How COVID-19 Will Affect the Economy of Asia—and Relations with the U.S.

Stuart Witchell

The coronavirus pandemic is ravaging the economy of Asia. Here’s what to expect in the coming months and years.

Much of Asia experienced the coronavirus pandemic early, but COVID-19’s effects will be long-lasting—and tensions between the U.S. and China aren’t going away. BRG Managing Director Stuart Witchell, co-leader of BRG’s Asia–Pacific region, weighs in on those issues, M&A activity and the future of Asian markets.

Let’s start big picture: How has COVID-19 affected Asian business activity with the U.S. and other countries?

Beginning in Lunar New Year—the world’s largest annual human migration—COVID-19 forced Asian manufacturing to a halt, which lasted through April. There is a bearish sentiment across Asian nations; a Bank of Japan survey highlights that the country’s business sentiment fell to a seven-year low in Q1 2020.

Many U.S. politicians have voiced fury over Beijing’s handling of the crisis, despite the country’s reliance on Chinese imports, including nearly half of all surgical masks imported into the U.S. before the onset of COVID-19. That’s according to a report in the Japan Times, which also noted that China supplies 48 percent of personal protective equipment (PPE) to the U.S. and 50 percent to the European Union. In response, President Trump’s former national security advisor John Bolton, as noted in the Japan Times’ report, called for “new policies to prevent continued U.S. over-reliance on China in supply chain.”

Ryan Hass and Kevin Dong of the Brookings Institution argue that U.S. policymakers view collaboration with China in response to COVID-19 as a “self-harming exercise in a zero-sum competition for global leadership.” This has been compounded by media narratives questioning the efficacy of Western democracy as opposed to Beijing’s heavy-handed response to COVID-19, or the seemingly more effective public health responses offered by some Asian technocracies such as South Korea and Taiwan.

How do you expect these tensions to play out as the world works to regain some semblance of normalcy? 

The World Trade Organization (WTO) offers two scenarios for the resumption of world trade: the optimistic and pessimistic. Within its pessimistic scenario, the WTO believes that Asia could see a 36.2 percent decline in exports in 2020, with 36.1 percent recovery in 2021. The WTO also predicts that “complex value chain” export offerings will be worst hit, which explains its forecasts for U.S. trade volumes: 17.1 percent lower at best or 40.9 percent lower at worst. 

The need for critical equipment including PPE, surgical masks and ventilators will keep U.S.-China “decoupling” at bay until the rate of infections has flattened significantly. Even if this does materialize, the extent to which U.S.-China tensions will impact non-China Asian economies is unclear. Association of Southeast Asian Nations (ASEAN) nations can always capitalize on reciprocal trade with China if globalization does fall out of favor.

Post-COVID-19, changes to the status quo will have a major impact on supply chains. For example, 80 percent of U.S. active pharmaceutical ingredients (APIs) originate from abroad, according to a 2019 Senate hearing. U.S. Senator and China hawk Tom Cotton has proposed a ban on buying Chinese APIs from 2022 onward, and Chinese exports will be subjected to even more intensive scrutiny in Washington. The extent of how Indian and other Asian exports will be similarly impacted remains to be seen.

Of course, Asia’s economic outlook remains contingent on global recovery, and the region’s economies are expected to suffer as a result of contracting U.S. and European economies, with Changyong Rhee, director of the International Monetary Fund’s (IMF) Asia and Pacific Department director, predicting 6.6 percent and 6 percent respective contractions.

Government fiscal and monetary response to the pandemic has been similar to past economic crises. What is unique about this one? Are there parallels to what we saw from 2007 to 2009?

One characteristic peculiar to COVID-19 has been drastic disruptions to global supply chains through social distancing. This, according to the WTO, has resulted in “labor supply, transport and travel” restrictions peculiar to a pandemic and that did not present during the global financial crisis.

With whole sectors of the economy shut down, the WTO highlights that a V-shaped global recovery is more likely if COVID-19 is viewed as a “temporary, one-time shock” and not a more pervasive trend. Rhee views COVID-19 in bleak terms, describing it as a “crisis like no other,” with Asia’s real GDP growth to stall at 0 percent in 2020—the region’s worst performance in 60 years. Rhee notes that Asia’s real GDP growth held at 4.7 percent during the global financial crisis.

Asian economies are experiencing COVID-19 differently. South Korea’s downward revisions to real GDP growth are 3.5 percentage points lower as the country has deployed technology-enabled solutions and restarted production. Thailand, Australia and New Zealand have seen 9 percentage-point lower revisions with global tourism grinding to a halt as governments seek to prevent a “second wave” of imported infections. But the region’s economic risk has been magnified by two slowdowns: Chinese and global.

China was relatively immune to the global financial crisis and enjoyed 9.4 percent growth in 2009 due to fiscal stimuli amounting to 8 percent of GDP. But now, China will be unable to shore up Asia’s economy as its GDP growth declines to 1.2 percent in 2020 (from 6.1 percent in 2019). In the latter instance, Rhee predicts the global economy will contract by 3 percent in 2020—giving rise to comparisons with the Great Depression.

Asian economies will of course suffer simultaneously, especially as Europe—ASEAN’s largest trading partner—contracts by 6.6 percent and the U.S. by 6 percent. There is reason for cautious optimism, however. Rhee predicts growth in Asia will “rebound strongly,” and a small number of Asian nations are returning to work having already faced second waves of imported infections. 

Once lockdowns are lifted, do you expect a surge in investment? If so, what would be behind the surge?

Populations across Hong Kong, Singapore, Japan and South Korea, by virtue of their relative proximity to Wuhan, experienced the first waves of infections before Europe and the U.S. Some of these economies may recover more quickly, although the danger of imported infections leading to subsequent waves of infections remains a possibility and will continually test governments’ capacities in crisis management. Asia’s near-term future is dependent on the economic recovery of its key trading partners, which leads to more questions around consumer behavior, fiscal policy and the rise of protectionism, “deglobalisation” or “decoupling.”

Rhee believes that Asia’s “real” sector—the one that produce goods and services—is being dealt a particularly hard blow by containment measures. While China is resuming production, other economies (such as Singapore) are experiencing a protracted wave.

Asia also remains reliant on broader global recovery in view of Thailand’s reliance on tourism, Australia’s on commodity exports and the region’s exports to China, Europe and the U.S. As the private sector reemerges from lockdown, backing from central banks and institutions will bolster investor sentiment if fiscal support measures are enacted early. By mid-April, 17 countries in Asia-Pacific had reportedly expressed interest in two IMF emergency financing mechanisms—the Rapid Credit Facility and the Rapid Financing Instrument. Fiscal stimuli in Asia’s emerging market economies are smaller when compared to their comparatively more developed economic counterparts, which may be because they have less fiscal wiggle room to deploy emergency funds. 

COVID-19 has so far impacted the way private equity and mergers and acquisitions are conducted in China and wider Asia; the most obvious impact is a pronounced slowdown in deals involving “Chinese targets, buyers and/or investors.” International law firms have highlighted that while certain transactions are proceeding slowly, others have been suspended. Transactions “without a direct China nexus,” such as those in Southeast Asia, have slowed due to a mix of “travel restrictions, market volatility, and general uncertainty” and “have had a chilling effect.” While we are told to expect a “great deal of uncertainty in the transactional space” with investors acting cautiously, opportunistic buyers with capital to deploy may seek to capitalize on companies impacted by COVID-19.

In Asia, this will likely take the form of specialist investors eyeing distressed debt and non-performing loans. Within China, this market has been restricted historically to four national asset management companies (AMCs). However, in early March 2020, the China Banking and Insurance Regulatory Commission (CBIRC) announced its approval of a fifth national AMC to offer foreign investors increased access to these markets.

Opportunities to attract investment may be obstructed by the post-COVID-19 era of protectionism, however, with certain European nations moving to protect “vulnerable” companies. The EU, Spain, France, Italy and Germany, as well as Australia, have taken or are contemplating protectionist measures to protect companies impacted by COVID-19 from foreign investors eyeing cheap assets. This may be viewed as an early indication of post-COVID-19 protectionism.

A surge in deal activity could tempt the parties involved to rush to finish transactions. Is that a smart way to proceed?

Categorically not. While sellers may be rushing to finish transactions to secure financing and safeguard their capital chains, investors would be wise to adopt a wait and see approach in response to fluid economic and regulatory climates. There may, of course, be certain opportunistic investors that are comparatively well prepared to capitalize on COVID-19, with certain sellers potentially prepared to accept lower valuations in PE transactions.

These issues highlight the need for investors to pause to conduct legal, financial, operational and reputational due diligence as opposed to rushing to capitalize on undervalued opportunities. There are likely to have been significant fraudulent activities throughout this pandemic, and it is important not to rely solely upon audited financial records and for investors to retain trusted advisors to support them with forensic investigations.

What should dealmakers keep in mind? What should they be doing to get prepared before activity ticks up, and what should they keep in mind once they’re in the throes of actual deal-making?

Before activity ticks up, investors should revisit their investment policies and strategies. Those seeking investments in distressed asset classes must consider the shifting regulatory landscape in close consultation with counsel and other external advisors. Similarly, government and regulatory departments working from home or operating on a shift basis may delay approvals. Investors may have opportunities to benefit from preferential government policies or subsidies across certain industries. 

Site visits and face-to-face meetings have temporarily been consigned to history unless investors can factor in social distancing and travel restrictions. Investors may need to revisit due diligence investigations to account for COVID-19-related issues, which could include supply chain disruptions, the ability of counterparties to service their obligations, and the resilience and prospects of an organization in the post-COVID era.

How could the fallout of COVID-19 affect the different markets across Asia? Will some be more attractive for investment—and some less?

COVID-19 has required Asian companies to review their working practices and supply chains and has driven innovation in certain markets. In China, for example, the private sector was required to pick up the slack due to chronic underinvestment in China’s healthcare sector. Before COVID-19, health expenditure accounted for just 5.2 percent of China’s 2017 GDP (half of which was governmental and three-fold less than the U.S. that same year). The need for remote healthcare access saw a surge in popularity in MedTech offerings. China’s aging population is also contributing to increased healthcare opportunities. Large Chinese corporates are converging on healthcare as they seek to develop all-encompassing apps offering diagnosis, prescriptions, referrals, appointment bookings, one-hour drug delivery and even insurance.

Higher-tech offerings will also see continued investment, particularly due to the reliance on cloud computing, drones, 5G and Internet of Things–enabled technologies by Asian technocracies during the pandemic. Companies leveraging these technologies alongside automation and artificial intelligence will enhance the resilience of their supply chains, according to an article by the World Economic Forum (WEF). The desire of consumers to remain at arm’s length will also drive further innovation in mobile and digital payment solutions, with the WEF highlighting that 31 countries have lifted contactless payment limits in 2020 to enable social distancing. Similarly, increased e-commerce offerings will enable consumers to avoid congested supermarket queues, while retailers can capitalize on the increased working-from-home culture. 

The current demand for PPE, ventilators and supply masks will subside over the mid-term as countries stockpile resources in fear of future pandemics. Additionally, the WEF notes that consumers will still want to dine out, travel and enjoy in-person experiences. Airlines are suffering, but several factors will combine to shore up the airline industry: the lack of alternatives, the release of pent-up demand once lockdowns are lifted and the status of certain airlines as “too big to fail.” In Asian markets, investors could look to such airlines to capitalize on the upside potential as lockdowns are lifted. 

Some Asian companies more attuned to food safety, alternative protein production, meal-delivery services and data centers are set to benefit from a private equity investment boom once the worst of the pandemic subsides. Data centers will benefit from surging demand for video conferencing, while data-security providers will capitalize on concerns over safeguarding digital data. Data is obviously more vulnerable outside the corporate environment, requiring firms to significantly enhance their data and security infrastructure if working-from-home arrangements become more engrained post-COVID-19. 

As activity resumes, investors may view emerging equity market stocks more cautiously. Much of the appetite and ability for investors to capitalize on these markets is contingent on the U.S.-China relationship, however, which only shows signs of worsening.