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Covid is back: How Chinese finance leaders are responding to the Omicron threat

By Vicky Li, FCMA, CGMA, Regional Vice President – North Asia, Association of International Certified Professional Accountants

Thanks to its “zero-COVID” policy, China has successfully contained the COVID-19 virus for nearly two years. But now it is battling a major outbreak of the highly transmissible omicron variant in Shanghai and has put the whole city under strict lockdown.

Members of the North Asia Regional Advisory Panel for the Association of International Certified Professional Accountants met to share their perspectives on the current impact of the pandemic, as well as the future economic outlook for China. Their main observations were:

 1. The extent of disruption varies by region

 Some areas of China, including the province of Jilin and the city of Shenzhen, are being heavily disrupted by the outbreak due to the imposition of lockdowns. This is inevitably having an impact on both operations and revenues, with production facilities having to close and consumers unable to go out and spend money. Businesses in certain industries, such as events and exhibitions, are at high risk of bankruptcy. In other areas – including the capital, Beijing – business is largely continuing to run as normal. Nevertheless, business people must test before they travel, and it can be difficult to move between cities.

 2. War in Ukraine is driving up costs

 Chinese businesses are not only having to deal with the pandemic. Like businesses throughout the world they are also affected by the war in Ukraine. Shipping companies are experiencing severe disruption when it comes to shipping goods to Europe. Transportation costs are also rising due to the increase in oil prices. Many businesses are experiencing a squeeze on their margins because it can be difficult to pass price rises onto customers.

 3. Chinese businesses face supply chain threats

 Supply chain security is an issue for businesses. They are experiencing considerable supply chain disruption because some suppliers can no longer deliver or are substantially increasing their prices. With the war in Ukraine fuelling fears of further supply chain disruption, commodities such as aluminium and steel have soared in price.

 4. China’s growth is set to slow

 In 2021, China’s economy grew by 8.1%. But Chinese finance leaders are concerned that the country’s economy may not perform at the same rate this year. While China is targeting a more modest growth rate of 5.5% in 2022, some analysts are predicting that it will even miss this target due to COVID restrictions. China has also set an inflation target of around 3% for 2022, but the country’s ability to meet this target is likely to depend on other factors, including the war in Ukraine and its associated impact on commodity prices.

 5. Companies are innovating in response to challenge

 Chinese companies see the current challenges as an opportunity to innovate. They are exploring options for developing online revenue streams for their businesses in addition to offline products and services. They are also using new communication tools and social media channels, such as WeChat and TikTok, to engage with their customers. Another opportunity for innovation is “selling future business” and locking up the cash generated from that process. In terms of how they are managing COVID restrictions, Chinese businesses are thinking creatively about how they deploy staff, for example running A and B teams, to minimise the risk of the entire workforce having to self-isolate.

 Future outlook

 Despite the challenges they face, the finance leaders on the panel were optimistic about the future. They believe that China is likely to adapt its response to COVID restrictions once it has a better understanding of the threat posed by omicron. As one finance leader put it: “We need to prepare for when Chinese government waives strict controls. Those who can run the fastest will recover the quickest.”