The coronavirus could cost the Chinese economy $ 60 billion this quarter.


The economic impact of the virus is still impossible to determine, but state media and some economists have said China’s growth rate could drop two percentage points this quarter due to the outbreak, which has crippled large parts of the country. A decline of this magnitude could result in a loss of growth of $ 62 billion.

China can hardly afford this kind of blow. Last year’s growth was already the weakest in the country in nearly three decades, as China faced rising debt and fallout from its trade war with the United States.

The coronavirus, which first appeared in the central city of Wuhan, has already killed more than 200 and infected more people than the SARS epidemic in 2003. A disease of this magnitude was not even on the radar. china radar. Before the outbreak, the government was more concerned that social unrest was its “black swan” problem – an unlikely but chaotic event officials feared could be spurred by rising unemployment.

Now Beijing is scrambling to stop the virus from wreaking havoc on its economy. The ruling Communist Party recently gave Premier Li Keqiang responsibility for combating viruses. The decision was a clear signal that stopping the virus is the government’s “top priority” right now, the official People’s Daily newspaper wrote in a recent comment.

So far, policymakers have taken action to help the businesses most affected by the rapid spread of the disease.

Central and local governments have so far allocated $ 12.6 billion for medical treatment and equipment.

Big banks have cut interest rates for small businesses and individuals in the hardest hit areas. And the Bank of China has said it will allow residents of Wuhan and the rest of Hubei province to delay repayment of their loan for several months if they lose their source of income due to the disruption.

The People’s Bank of China, the country’s central bank, has said it will ensure there is sufficient liquidity in financial markets when they reopen next Monday after a 10-day Lunar New Year holiday. When Hong Kong markets reopened earlier this week, the Hang Seng Index (HSI) plunged nearly 6% in a few trading days.

Aggressive action

The government will likely have to be even more aggressive in the coming months to avoid a more serious slowdown, according to Chinese economist Zhang Ming.

Zhang, who works at the Chinese Academy of Social Sciences, wrote this week that he expects economic growth to slump by a percentage point to 5% in the first quarter, assuming the epidemic lasts until the end of March. He described this as his most optimistic scenario, but did not give a specific forecast if the outbreak were to last even longer.

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The government could cut taxes and increase spending on public health and vocational training, Zhang said. He also expects local governments to spend more on infrastructure. By stimulating economic activity and creating jobs, he added, cities can compensate for any weakness in private investment in real estate and manufacturing.

The central bank is also expected to make further interest rate cuts to stabilize the economy, Zhang said. Overall, he said such measures could help growth rebound in the next quarter and push annual GDP growth to around 5.7%. While this is lower than last year’s 6.1% growth, it would be in line with many analysts’ expectations.

Others take a more pessimistic view.

Nomura analysts believe growth could fall by two percentage points or more in the first quarter. The Global Times, a state-run tabloid, wrote on Friday that the epidemic could cut GDP growth by two percentage points this quarter, citing industry insiders. The government’s efforts to contain the virus by extending the Lunar New Year holiday and forcing factories to close could “take a piece of the country’s manufacturing industry and disrupt the global supply chain.”

Measure the impact

It is too early to tell if this level of upheaval is on the horizon. You’re here (TSLA) was forced to temporarily close its new factory built in Shanghai. And Apple (AAPL) lost production from its suppliers in Wuhan. The longer-term impact on the two companies is much less clear.
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Other sectors may have more to lose at this time. Tourism – a multibillion-dollar industry during the Lunar New Year – has been decimated as the government quarantines major population centers and people avoid travel for fear of infection. Major travel agencies, hotels and airlines offered refunds for most of February, while some airlines suspended services to and from China.

The holiday season has been canceled and major tourist sites have been closed. The huge Chinese box office will also likely be hit after the withdrawal of several blockbuster films slated for release during the holiday season.

Zhang and other analysts have suggested the fallout could be even more severe than after SARS, the respiratory illness that briefly plunged China’s economic growth before rebounding nearly two decades ago.

The spread of the coronavirus threatens to cause job losses and push up consumer prices, exacerbating the economic problems that already exist.

The job market is already under strain this year. Industries that traditionally create a lot of jobs, such as the tech sector, have been hit by the economic downturn. The coronavirus outbreak will make matters worse, according to Zhang.

The 290 million Chinese migrant workers are among the most exposed to an economic crisis. Many of them travel from rural areas to cities to take up construction and manufacturing jobs or do low-paying but essential jobs, such as serving tables in restaurants, delivering packages or acting as janitors.

But as many factories and businesses remain closed, millions of those workers could struggle to find jobs after the extended Lunar New Year vacation ends. More than 10 million migrant workers in Hubei province alone could also face discrimination from employers fearing to spread the virus.

How the coronavirus is already hurting global businesses

Zhang warned that China’s unemployment rate – already a concern for officials – could reach an all-time high in the coming months. The rate traditionally hovers around 4% or 5%.

He added that the virus could also make consumer goods more expensive. Budgets are already tight due to rising debt, and a pork crisis sparked by the African swine fever epidemic among Chinese pigs last year has spiked the price of meat. Today, vegetable prices have risen as people rush to buy basic necessities during the virus outbreak, according to state news agency Xinhua.

Other challenges

Dealing with the disease will make some of China’s other issues much more difficult to resolve, including its delicate trade relationship with the United States.

Under a truce reached earlier in January, Beijing agreed to buy $ 200 billion worth of U.S. goods over the next two years. Analysts have previously said that China’s contraction in domestic demand will make it difficult for the country to meet these targets. If the virus weakens the country’s purchasing power even further, those goals could become even more out of reach.
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Substantial tariffs totaling hundreds of billions of dollars also remain in place on many Chinese products. And Washington has made it clear that these will remain a form of leverage as the two sides negotiate the next phase of their deal.

Even so, at least one analyst believes the trade war is unlikely to escalate simply because China is “temporarily” unable to honor its trade commitments. The United States is in an election year, and such action could jeopardize President Donald Trump’s campaign, said Ken Cheung, chief foreign exchange strategist for Asia at Mizuho Bank.


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