Caixin
Jun 04, 2021 05:45 PM
OPINION

Opinion: How Will the Covid-19 Resurgence in Southeast Asia Affect China?

Covid-19 has continued to spread in countries and regions in Southeast Asia since May; the number of new Covid-19 cases rose sharply in some areas of Vietnam, Thailand, and Taiwan. Since March, the number of daily newly confirmed cases has exceeded 20,000 in Southeast Asia and the number of daily deaths returned to more than 300.

In particular, the average number of daily new Covid-19 cases in May exceeded 1,000 in the Philippines, Indonesia, Malaysia, and Thailand. Infections have rebounded in Thailand and Malaysia since April and surged in Vietnam and Taiwan in May. As of May 25, the average number of daily newly confirmed cases in Vietnam was 113.8 in May, 10 times that in April; the average number of daily newly confirmed cases in Thailand was about 2,800, more than twice that in April. In addition, the average number of daily newly confirmed cases in Taiwan rose sharply from 3.3 in April to 186.6 in May.

Covid-19 outbreaks in Southeast Asia are unlikely to get out of control and Southeast Asia is unlikely to repeat what happened in India, in our view. The outbreak in India has spiraled out of control. In addition to the mutation of the virus, inadequate Covid-19 containment measures may also be a main reason behind the country’s out-of-control Covid-19 outbreak. Southeast Asian economies have done a good job in preventing and controlling the spread of Covid-19. Indonesia and the Philippines have begun to bring Covid-19 under control since April with cases trending downward, and new cases in these countries have maintained a downward trend despite surging cases in India. Covid-19 cases recently rose sharply in some areas of Vietnam and Taiwan, but these economies have strong ability to control Covid-19 and they quickly tightened their containment measures after sharp rises in their cases. Based on Institute for Health Metrics and Evaluation estimates, the number of daily newly confirmed cases in Vietnam and Taiwan is likely to peak and then fall in late May.

Empirical data shows that recent Covid-19 outbreaks in Southeast Asia have not produced substantial impacts on the overall foreign trade of related economies. In 2020, the 10 ASEAN economies and Taiwan accounted for 17.1% of the Chinese mainland’s exports and 23.4% of imports, making them the largest source of imports for the Chinese mainland. Covid-19 outbreaks could directly affect trade among them. However, experience from economies hit hard by Covid-19 (e.g., India, the Philippines and Indonesia) shows that outbreaks have not produced substantial impacts on overall foreign trade. For example, the outbreak worsened quickly in India in April, but the country’s imports from China and exports to China grew 155.4% year-on-year, implying a two-year CAGR of 24.7% (rising 11.6 points from the two-year CAGR in March). Among ASEAN economies, the Philippines and Indonesia have been hit hard, but the two-year CAGRs of the two countries’ trade with China since the start of 2021 are higher than those in 2019 before the Covid-19 pandemic.

High-frequency data shows that stricter containment measures have produced relatively limited impacts on Southeast Asian economies’ production and exports since May. To cope with outbreaks, some economies in Southeast Asia have tightened their containment measures, but their current measures are less strict than those taken over the same period of last year. In the first two weeks of May, the two-year CAGR of Vietnam’s exports was 10.6% (vs. 14% in the first two weeks of April) and the two-year CAGR of the country’s imports was 9.1% (vs. 15.1% in the first two weeks of April). The two-year CAGR of Vietnam’s exports in the first two weeks of May was lower than the two-year CAGR of Vietnam’s exports in the first two weeks of April, possibly due to the recent Covid-19 outbreaks in Southeast Asia. For example, the Vietnamese city of Bac Giang decided in mid-May to temporarily close four industrial zones to contain Covid-19. We believe the decline in the two-year CAGR of Vietnam’s exports in the first two weeks of May 2021 was a normal fluctuation that did not exceed the range of fluctuations in normal years, and the slowing growth was better than the negative growth over the same period of 2020 when Covid-19 containment measures were stricter.

We suggest keeping an eye on possible impacts from Covid-19 outbreaks in Southeast Asia, especially on sectors with heavy reliance on international trade. The Chinese mainland mainly imports labor-intensive products (e.g., footwear, wood products and textiles) from ASEAN economies. In 2019, imports of footwear products from ASEAN economies accounted for 58.7% of the Chinese mainland’s total imports of such products. The Chinese mainland is relatively reliant on some capital-intensive or technology-intensive products from Taiwan and imports of electromechanical and audio-visual equipment, plastic and rubber products, and chemical products from Taiwan all account for more than 5% of the Chinese mainland’s total imports of such products. In particular, electromechanical and audio-visual equipment imports from Taiwan accounted for 18.8% of the Chinese mainland’s total imports of such products in 2019.

In case of a faster than expected spread of Covid-19 and stricter than expected Covid-19 containment measures, we think some labor-intensive products from the Chinese mainland may replace such products from Southeast Asian economies to some extent. In the base-case scenario, we believe the resurgence of Covid-19 in Southeast Asia will have a limited impact on China. If Covid-19 spreads on a large scale in Southeast Asian economies, or these economies introduce stricter Covid-19 containment measures, we believe orders for some industries or companies may be transferred to the Chinese mainland. The Chinese mainland’s exports of labor-intensive products such as footwear, textile and leather products now account for more than 30% of global exports of such products. We think the Chinese mainland’s production capacity for such products may replace part of ASEAN economies’ production capacity for such products. In addition, we believe the Chinese mainland’s production capacity for electromechanical and audio-visual equipment, plastics, rubber and metal products may replace part of such production capacity in Taiwan.

Peng Wensheng is chief economist and head of research department at CICC.

The views and opinions expressed in this opinion section are those of the authors and do not necessarily reflect the editorial positions of Caixin Media.

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