Will the coronavirus outbreak derail China’s economy?
5 min read
Image: Yahoo Finance
By Jonathan Miraud
Économiste
Jiangxi university of finance and economics (JUFE)
On the 31st of December 2019, China alerted the World Health Organization (WHO) of 11 cases of pneumonia in Wuhan (Hubei Province). Wuhan, a large city with a population of 11 million, is the epicenter of the outbreak. Shortly after China alerted the WHO of the pneumonia cases, one patient was found to be infected with a new type of coronavirus, which was then named novel coronavirus. On January 30, 2020, the WHO named pneumonia infected by the novel coronavirus as an acute respiratory disease, and then declared the outbreak a public health emergency of international concern. The organization later proposed that the novel coronavirus be named COVID-19.
COVID-19 is now considered an epidemic. It has spread to several countries around the world and fears arise on whether the outbreak will have negative ramifications on China’s economy. Many economists have made predictions about the effects of COVID-19 on the Chinese economy. Some are gloomy about the possible negative impacts it will have on the economy as it would disrupt the global supply chain in the short term, while other economists are pretty optimistic about the future of China’s economy. For example, CNBC economist Ed Hyman forecast a 0 % GDP growth for the first quarter of 2020. It is important to note that the virus shock will have some short-term negative impacts on the country’s financial system as fear arises among investors, but this will only be short-lived. It is hard to quantify the spillover effects right now as it depends on how long the spread of the virus will last. The economic structure of China is changing gradually (from an export-oriented growth to a consumption-driven growth) and has become more resilient and balanced to offset internal headwinds such as the COVID-19 virus.
From the scope of transmission, response to control measures, economic shocks and other factors, the COVID-19 virus can be compared to SARS in 2003. The SARS epidemic started in December 2002 and gradually spread at the turn of winter and spring in the first quarter of 2003. The epidemic entered its peak in the second quarter, peaked around May, and was gradually controlled by the middle of the year. After the SARS epidemic was contained, the government adopted strict epidemic control measures, particularly in the second quarter.
The upward cycle of the Chinese economy did not change due to the SARS epidemic, but the contribution rate of the tertiary sector to economic growth dropped significantly that year. The Chinese economy during the SARS period in 2003 was in a high-growth stage of heavy chemical industrialization, urbanization, and consumption upgrade. From the perspective of economic growth throughout that year, the SARS epidemic did not change the rising trend of the Chinese economy, and the GDP increased by 10% year-on-year. It was 0.9 percentage points higher than the previous year, which was closely related to the rapid recovery of the primary and secondary sectors after the epidemic. The contribution rate of the tertiary sector to economic growth dropped from 46.5% in 2002 to 39%. However, after 2004, the contribution rate of the tertiary sector to GDP picked up again, while the contribution rate of the secondary sector to economic growth dropped. Although the short-term economic structural adjustment slowed down, the impact of the SARS epidemic in 2003 on the economy and economic structure was short-term and did not affect the overall trend of economic growth and economic structural adjustment in subsequent years.
In order to further study this topic, there are three sectors that need to be analyzed:
Real Estate: New construction projects will be completely suspended during this period until the epidemic is under control. This will inevitably affect the contract delivery date, which will have a significant impact on the commercial real estate industry in the short and medium term. If the epidemic is contained before the end of February, there will be little material impact.
Tourism: Domestic and outbound tourism have all stopped, with heavy losses. As one of the few long holidays throughout the year, the Spring Festival holiday was originally a golden period for the tourism industry. The short-term impact on tourism is huge, and the impact throughout the year is small. It is possible that the loss that will occur in the first half of the year will be compensated in the second half of the year. It is expected that the overshooting rebound will be relatively obvious. Quarterly income and profits usually account for 20% of the year, and the impact of the epidemic on annual income and profits still depends on the duration of the epidemic.
The financial system: China’s financial system came under severe strain over fears and uncertainty generated by the COVID-19 outbreak. China’s central bank has stepped in to boost the economy by injecting 173 billion Euros of liquidity in an attempt to cushion the impact of the virus spread and restore order. This will help lubricate the financial system and keep credit growing steadily. In addition, The People’s Bank of China has also announced that it will lower lending rates in order to grease the financial system’s wheels and keep them spinning. This may also help mitigate volatility in the market.
Most analysts are still predicting growth well above 5% based on what is known so far about the virus spread and the likely impact on consumers, businesses and government. It is expected that most of these negative ramifications would be temporary. China’s central bank still has room for fiscal and monetary policy and foreign companies are still confident about Chinese markets despite virus spread. Foreign Investors will remain confident and there won’t be any capital outflows from china just because of the epidemic. China’s government is taking drastic measures to counter the spread and restore investors’ confidence and it is likely that it will be contained by mid-April and short-term losses will be offset by strong rebound in economic activities.
In conclusion, with the strong guidance and investment of a large amount of labor and materials by the governments at all levels of the viral epidemic, researchers, medical staff, and the general public are devoted to controlling this health crisis. Scientists around the world are now developing vaccines for the COVID-19 virus with the support of the government. The impact of the epidemic will be severe in the first quarter. Many forecasters have revised down their GDP growth forecasts to 5%. However, the government has the right policy toolkit to help cushion the impact on China and the global economy.
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