In the News: Business Disruption; Force Majeure; and JP Morgan Bond Inclusion

Chinese economy still faltering despite drop in new virus cases

The number of new novel coronavirus cases, also known as COVID-19, in China has dropped significantly in recent days, especially outside Hubei province, the center of the current epidemic. According to official announcements, just 202 new infections were reported across China on Mar. 1, the lowest daily figure since Jan. 22. Of those new cases, just six are not located in Hubei, a stark decrease from the peak on Feb. 3 of almost 900 new cases outside Hubei.

However, China's economy is still far away from returning to normal. Many manufacturers are still unable to meet orders due to worker shortages while some businesses are unable to source supplies due to supply chain disruption. Bloomberg reports that the economy is forecast to grow at its slowest rate since 1990, with Goldman Sachs Group Inc estimating an expansion of just 2.5% in the first quarter of 2020. In response, China's state planning agency, the National Development and Reform Commission (NDRC), has instructed less severely affected regions to fully resume normal activities and end transport restrictions.

China must balance epidemic containment on one hand with the need to resume normal economic production as soon as possible on the other. According to an NDRC official, the government will group counties apart from Beijing and Hubei into "low-risk", "medium-risk" and "high-risk" categories in order to devise appropriate business recovery plans in accordance with the level of risk faced by different areas. Meanwhile, China's central bank will look to further boost support for small and medium-sized banks to support the real economy, an official said on Feb. 27. The central bank has already set up a special low-cost refinancing facility of 300 billion yuan ($42.7 billion) for national and local corporate banks, with additional targeted support to businesses directly involved in fighting the epidemic.

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Record number of force majeure certificates issued to Chinese businesses

The certificates support local businesses' efforts to seek emergency exemptions to their contractual agreements with foreign counterparties while they are unable to perform their contractual obligations in the current crisis. Only around 30% of China's small and medium-sized enterprises have resumed work, a Ministry of Industry and Information Technology official said on Feb. 27. According to various reports, Chinese companies that have received the certificates include carmakers, steelworks, and electronics companies.

According to the CCPIT, the certificate can partially or fully exempt its possessor from contractual performance as it has "significant execution power abroad" and is recognized by "government, customs, chamber of commerce, and corporations" in over 200 countries and regions. However, there is controversy surrounding whether the current situation constitutes force majeure per se, as well as whether all Chinese companies are entitled to invoke the force majeure defense to seek relief from contractual performance. On Feb. 10, the Legislative Affairs Committee of the Standing Committee of National People's Congress, China's legislature, confirmed that the administrative actions taken by the Chinese government in response to the epidemic should be regarded as a force majeure as they are "unforeseeable, unavoidable, and insurmountable." However, these certificates alone are unlikely to exempt Chinese counterparties from their contractual obligations in a foreign court or arbitration tribunal, according to Hill Dickinson's Hong Kong-based legal director Edward Liu, as common law jurisdictions such as English law require explicit force majeure clauses in the contract for the force majeure defense to be available.

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JP Morgan includes China bonds in its indexes

JPMorgan has begun including China's government bonds in its Government Bond Index Emerging Markets (GBI-EM) suite of indexes, marking the start of a 10-month inclusion process from Feb. 28. The move could lead to a capital inflow of $20 billion into China's onshore debt market, the South China Morning Post reports. The inclusion involves nine bonds with maturities of between five and 10 years, which will eventually give China a 10% weighting in the flagship index tracked by $202 billion of funds.