How The Coronavirus Outbreak Could Wreck The Chinese Economy

The deadly novel coronavirus (nCov) has brought the ‘factory of the world’ China to a grinding halt. The communist government has shut down cities in order to contain the spread of this deadly virus. Cities after cities are turning into ghost towns.

“Provinces accounting for almost 69% of Chinese GDP will remain closed for more than an extra week after the annual Lunar New Year holiday, shutting factories, shops and restaurants, leaving ships trapped at port, and slamming household spending,” says a report in Bloomberg.

In light of the enormousness of the panic, the official figures on the number of affected people and those who have succumbed to nCov seem totally untrustworthy. A report in The Lancet estimates that as of 25 January, 75, 815 individuals may have been infected in Wuhan alone as opposed to less than 1,000 reported by the Chinese government.

While the world is still struggling to get a grip on the actual scale of the health risk nCov has become, countries across the globe are also concerned how their economies will be affected due to shutdown of factories in China. In 2003, an outbreak of severe acute respiratory syndrome (SARS) had cost the world growth “one-quarter to one-third of a percentage point” while knocking off “one to two percentage points off China’s GDP that year”.

Currently, the official death figures from nCov have already outnumbered those from SARS. The gap between those infected is even higher (560 people are dead from nCov compared to 349 killed by SARS. Official figures peg infected at 28,000 from nCov while WHO figures for SARS infected were only 5,327). What is more worrisome is that there is no remedy in sight to tackle the new virus.

It is pertinent to note that China’s GDP now is almost 10 times bigger than it was in 2003. Number of Chinese who travel abroad per year is eight times greater thereby increasing the risk that much. As per Bloomberg economists, “even in a containment scenario, China’s first-quarter GDP growth may slip to 4.5 per cent year-on-year — a drop from 6 per cent in the final quarter 2019, and the lowest since data began in 1992.”

Rahul Jacob, who covered the SARS epidemic in 2003 as the Hong Kong bureau chief for the Financial Times, writes that while SARS is useful as a historical parallel, “it is a poor guide of how much damage the current lockdown on China could mean for the world economy — and for countries such as India that are dependent for raw materials as well as consumer goods from the country. China’s integration with the world’s supply chains was in its infancy in 2003.”

“China accounts for 17% of global gross domestic product (GDP) today, up from 4% in 2003, but this figure underestimates its importance in complex global supply networks. In 2018, China was the world’s biggest trading nation accounting for 13% of global exports against 9% for the US, even though its economy is second to the US,” he adds.

Take the case of Wuhan, the epicentre of nCov, and a vibrant industrial hub. There are 384 key industrial sites (146 of which are of automotive) and 27 logistic hubs in this city. “Hundreds of major manufacturers have had their links to the global supply chain severed. Robert Bosch GmbH, the world’s largest car-parts maker, had to shutter two factories employing a total of 800 people in Wuhan. Other auto part manufacturers, including Honda Motor Co. Ltd. and Nissan Motor Co. Ltd., have also closed their facilities in Wuhan,” Bloomberg reports.

But that’s not it. In order to contain the virus, key coastal export provinces are in shutdown phase too and this is adding to further disruption. “China is the largest exporter of intermediate manufactured goods that can be resold between industries or used to produce other things, so its problems quickly reverberate through global supply chains. Indeed, global reliance on those products doubled to 20% from 2005 to 2015,” notes Bloomberg report.

Asian factories are going to be the worst affected as they import 40 per cent of the intermediate goods from China. Hong Kong will be worst affected and may lose between 1.5 and 2 per cent points in GDP growth in the first quarter of 2020. Countries like South Korea, Vietnam will be next as they benefit hugely from Chinese tourists. Global Crude oil prices have slumped by more than 20 per cent due to massive decline in demand from China. US-China trade deal that President Trump was hoping to gain wouldn’t bear fruits for him before the November elections. China had committed to purchase the additional $200 billion of US goods over two years.

While the whole world is going to be affected by nCov outbreak, the biggest loser will be China itself. Ian Bremmer, a foreign affairs columnist and editor-at-large at TIME, writes that “the greatest cost will come to China’s reputation as a reliable trade partner. In developed countries, health care systems are quick to identify public-health risks and better able to respond to them. China’s top-down authoritarian political system makes things worse.”

“China creates the impression that it has learned little since the SARS crisis, giving the rest of the world reason to try to reduce its dependence on China for growth and production,” he adds.