The coronavirus pandemic has brought economic hardship to China unseen since the economic reform in the 1970s. The pandemic led to a sudden stop of the Chinese economy in the first two months of 2020 and then in other parts of the world from March.

The evolving crisis gave rise to three stages of interaction between China and the rest of the world – predominantly one-way negative spillovers to the global economy during China’s lockdown, predominantly one-way negative spillbacks to China during the global lockdown, and a return to normal two-way feedbacks as the world starts to emerge from lockdowns.

·In Stage 1, China’s negative spillovers to other economies were strong both through demand and supply channels. Countries in the Asian supply chain and commodity exporters were most affected. Western economies were less impacted by comparison.

·In Stage 2, the negative spillbacks to China predominantly have come from the demand side. The projected contractions in U.S. and Germany are set to give the biggest hit to China’s exports.

·The macroeconomic impact from supply chain disruptions is likely to be much more modest, but it will add to the demand shock and weigh on manufacturing activities. A high reliance on imported inputs makes certain high-tech sectors in China particularly vulnerable.

·As countries start exiting from lockdowns, Stage 3 begins, with a two-way feedback between China and the global economy prevailing in normal economic conditions in today’s integrated world. Two-way feedback can be positive or negative.

The extraordinary challenges brought by the pandemic require bold actions in crisis fighting and strategic realignment of the economic structure over the longer term. The following areas are of particular importance.

·In the short term, fiscal policies need to be forceful, with accompanying monetary and other policies, in order to prevent a longer downturn, and to avoid international spillovers and spillbacks enforcing negative feedback loops.

·Policy support needs to be balanced poverty relief and growth support, between large, state firms and small, private firms, and between investment and consumption. Public investment stays an important engine to support the economy, as in previous downturns. But more policies are needed than before to support the most vulnerable social groups and firms.

Over the longer term, there should be a strategic re-think and re-organization of supply chains. A retreat from global supply chains is not feasible. A riskier and more fragmented global system will inevitably trigger efforts to ensure security of access to essential inputs.

Download the full report：From China Shock to Global Shock – Economic Spillovers and Spillbacks During the Coronavirus Pandemic