Surviving the deluge

The world’s economies are facing one of their most difficult periods since the global financial crisis, and China is unlikely to escape the consequences. George W Russell asks legal experts how clients can draw on experience from damage control practice around the globe

Asia faces not only a cryptocurrency winter, but also the chill of an economic slowdown accelerated by Russia’s war on Ukraine, lingering covid-19 lockdowns in China, and spiralling inflation across much of the world. US corporations in China have cut their revenue projections, according to the American Chamber of Commerce, while many European companies plan to downsize operations. That sentiment is echoed in a wider global “misery index” says Keith Wade, chief economist and chief strategist at Schroders in London.

“The ‘misery index’, an economic indicator that helps determine how the average citizen is doing economically, is now in the highest 20% of readings across almost 50 years,” says Wade. “We’re effectively at the early stages of an economic slowdown.”

Asia is also facing economic headwinds. In the second quarter of 2022, China’s economy grew at the slowest pace since the start of the pandemic. The world’s second-largest economy expanded just 0.4% year-on-year between April and June, official data showed.

“We cannot fully exclude the possibility of a recession in the Chinese economy, but consider it not highly likely,” says Ulrike Glueck, managing partner of CMS in Shanghai. She points to the reining in of covid-19 outbreaks as a signal of recovery, but cautions: “Other ongoing and/or unpredictable factors will still pay a role and cannot be left out of consideration.”

The new economy has been particularly vulnerable. Singapore-based Sea Group’s e-commerce arm, Shopee, shut its India operations in March and laid off staff in Indonesia, Thailand and Vietnam. The Chinese ride-hailing platform, Caocao Chuxing, has dramatically reduced its headcount by up to 40%, while internet giants such as Alibaba have shed employees, according to official media.

Crypto platforms have been devastated by the slump in the value of digital assets. The Singapore-based crypto hedge fund, Three Arrows Capital, declared bankruptcy, while China’s Huobi Global is weighing layoffs.

“We are undergoing a systemic disruption to international trade and economics that has not let up since we were hit by the coronavirus pandemic,” says Philip Teoh, partner and head of the admiralty and shipping, insurance and international trade practice group at Malaysian law firm Azmi & Associates in Kuala Lumpur.

Even Asia’s much-vaunted manufacturing activity has stalled. June data showed many companies were hit by supply disruptions caused by China’s strict covid-19 lockdowns, while sharp economic slowdown risks in Europe and North America have stoked fears of a wider recession.

“Since the outbreak of the covid-19 epidemic, incidents that increase the likelihood of supply chain disruptions have occurred frequently and severely, such as port delays, shortage of key components, energy supply dilemmas and cost increases,” says Glueck.

China’s factory activity is rebounding, though, as restrictions mostly ease and companies adapt to “closed-loop” working to limit the spread of coronavirus. But output in Japan, South Korea and Taiwan has been crimped by supply disruptions, rising costs, and raw material and component shortages.

For some lawyers, the situation has obviously become untenable. “Clearly lockdowns have deeply impacted the Chinese economy and have damaged economic development,” says Cheng Tai-Heng, global co-head of arbitration and trade, and co-managing partner at Sidley in Singapore. “My instinct is they know this and it’s not positive or sustainable. China will reverse course.”

LOOMING GLOBAL RECESSION

As the world’s largest economy, the US is the focus of interest. A recession is indicated by two consecutive quarters of declines in GDP, which is increasingly likely, according to most pundits. “We think that growth worries will gain traction with the monetary authorities,” says Eugene Leow, senior rates strategist at DBS in Singapore.