Pandemic reveals some supply chain vulnerability
The outbreaks of Covid-19 have led to production disruptions across the world as governments have imposed severe mobility restrictions to combat the virus. Earlier in February, factories in various industries and countries reported suspensions as a result of shortages of imported inputs from China. Our recent research shows that overseas' lockdowns may lead to production disruptions in China too, since imported components and equipment remain critical in many areas, for both exports and domestic production, if production suspensions last longer in the US and Europe.
Increased pressures for supply chain decoupling
In response to the pandemic-related supply chain issues and concerns, officials in some countries are pushing for companies to move supply chain away from China and closer to home, including with financial incentives. Meanwhile, the US has also published various rules to tighten export controls to China and restrict China's access to US technology further. As noted by UBS tech analysts, the US is likely to impose additional restrictions on Huawei, which could be another force that may reshape the landscape in the related sectors and lead to more decoupling.
UBS Evidence Lab CFO survey suggests no mad rush out of China now
The latest UBS Evidence Lab CFO survey, which was conducted before the recent escalation of US-China tensions, indicates that CFOs in China were hopeful of some easing of trade tensions and technology restrictions in 2020. Consequently, companies' intention to move out of China remained fairly stable compared to the previous surveys, with about half of the manufacturers saying that they have already moved part of production away and around 60% suggests that they may move or continue to move in the future. The recent escalation of the US-China tensions and further tech related tightening may surprise the survey respondents.
Downward pressure on investment from decoupling
Further pressures for supply chain decoupling will likely put downward pressure on domestic investment, dragged by weaker demand and heightened uncertainties. We think this may have a bigger impact on China's manufacturing investment than a potential drop in FDI as the latter has become less important in overall fixed-asset investment (FAI) and has shifted more towards services and sectors catering to China's market. We also do not see immediate acceleration of supply chain relocation out of China, given the large hit by Covid-19 on corporate revenue and high uncertainties. We forecast China's manufacturing FAI to decline by 5% in 2020, while acceleration of tech decoupling may reduce China's potential growth.