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The Wuhan virus is the last thing China’s economy needs right now

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By on China economy

If Beijing fails to contain the disease quickly, it will cause more pain for a country that was already trying to avoid a severe downturn by trying to encourage more consumer spending. An epidemic could have the opposite effect.

“If you’re trying to rebalance the Chinese economy, this is one of the last things you want to see,” said Logan Wright, director of China markets research at Rhodium Group.

Last year, the world’s second-largest economy experienced its slowest pace of growth in nearly three decades as it faced mounting debt, cooling domestic demand and US tariffs, many of which remain in place despite a recent truce. Beijing is also worried about unemployment and in recent weeks has announced a wave of stimulus measures aimed at preventing mass layoffs.
Most of the tariffs imposed by Washington on billions of dollars worth of Chinese goods have not gone away, said ING economist Robert Carnell, adding that Beijing has already pushed “every political lever that could be pushed” to try to offset the effects of trade. contestation.
China’s economy is just “managing” right now, he said.
Wright called the timing of the outbreak “particularly unfortunate” given the Lunar New Year holiday. The period is the largest annual human migration on Earth, during which hundreds of millions of Chinese travelers typically cram together themselves on trains, buses and planes for family reunions.

The spread of the virus prompted Chinese authorities to take the largely unprecedented decision to partially lock down Wuhan, a city of 11 million people in central China where the virus originated. Airline regulators have also asked Chinese carriers to offer free cancellations on flights to Wuhan, while state media have reported that Chinese rail authorities are taking similar action.

A SARS-like scenario

China has a good sense of economy problems that could lie in wait for us.

The 2003 SARS epidemic, which sickened 8,098 people and killed 774 people in 37 different countries, cost the global economy $40 billion, according to a National Institutes of Health study. The economies of China and Hong Kong bore the brunt of that burden, the authors said.

Like SARS, the Wuhan coronavirus outbreak could spark widespread fear and cause people to hide and avoid going out. This kind of behavior would be a serious blow to the service sector, which today accounts for around 52% of the Chinese economy.

“As soon as you’re worried, you’re worried,” Carnell said. “You stay home, if you can. You don’t go out to the local food court, you try not to take public transport, you try to work from home, you don’t travel for pleasure. You don’t get on a plane, you don’t go to movies, restaurants or conferences.”

The SARS outbreak forced the cancellation of a weeklong May Day holiday in China, forced the postponement or abandonment of sporting, business and cultural events, and turned Beijing into a virtual ghost town.

Investors are already worried about what the Wuhan virus could mean for China’s growing travel industry. Shares of the country’s three major airlines – Air China, China Southern and China Eastern – all closed 2.5% or higher in Shanghai and Hong Kong on Thursday. And the aviation sector “will likely remain under pressure as confirmed cases are expected to rise,” said Andrew Lee, equity analyst at Jefferies.

SARS also had a broader impact on the economy. China’s annual growth rate fell to 9.1% in the second quarter of 2003 from 11.1% in the first quarter of the same year, according to brokerage firm Macquarie Group.

This time around, the hit to China’s GDP could be even worse, as the sectors most directly affected now make up a larger portion of the economy, Commerzbank analyst Hao Zhou and economist Marco Wagner in a research note. For example, tourism now accounts for around 5% of China’s GDP, up from 2% in 2003.

“If history is any guide, there is clearly a risk that already struggling Chinese consumption will face new headwinds if the (Wuhan) virus cannot be effectively controlled,” Hao and Wagner wrote.

Limit the economic blow

But China is stepping up efforts to contain the virus, including Wuhan’s partial lockdown, and some lessons have been learned since 2003, when authorities were slow to release information and initially downplayed the severity of the SARS outbreak.

A Visual Guide to the Wuhan Coronavirus
“Rumours and bad news were covering up good news at the time, and people were especially cautious as a result,” Wright said, adding that he expected the economic impact of the Wuhan virus to not be. not be as severe as during the SARS crisis.

And as frightening as the 2003 outbreak was, experts say the impact on China’s economy was short-lived.

After SARS passed, China’s growth rebounded quickly and soared to 10% in the third quarter of 2003, according to Commerzbank’s Hao and Wagner.

Some remain skeptical about Beijing’s way of dealing with the outbreak. A senior US State Department official, for example, said on Wednesday that the United States is concerned about transparency within the Chinese government regarding the Wuhan coronovirus. But the official added that Washington has seen encouraging signs that Beijing understands the seriousness of the problem.
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