Author: Yan Liang, Willamette University
Just when China and the United States breathed a collective sigh of relief after sealing the ‘phase one’ trade deal, the Chinese economy encountered a ‘black swan’ — an unforeseen event with major consequences. The novel coronavirus (COVID-19) has so far infected over 80,000 people and claimed more than 2900 lives in China. Counter measures to contain the epidemic are taking a significant toll on the Chinese economy.
The Chinese government locked down 48 cities and four provinces, with restrictions on travel affecting over 500 million people. The hardest hit sectors are tourism, restaurants, cinema, transportation and energy. The first three sectors had a combined estimated loss of US$143 billion over Chinese New Year. For transportation, many airlines have cancelled or reduced flights. Trips after Chinese New Year were down by 80 per cent compared to the same period last year, while oil consumption dropped by 20 per cent and electricity production was down approximately 60 per cent.
Manufacturing production — from automobiles to electronics — has also been significantly curtailed. Wuhan, the epicentre of the epidemic, is a major manufacturing city. Apple, Tesla, Hyundai, Starbucks, Ikea and many other multinational corporations are cutting down or even temporarily closing their operations in China. China’s export demand also fell significantly due to the logistical freeze and the World Health Organization’s declaration of a Public Health Emergency of International Concern. Shipping data from Alphaliner showed that container vessel calls at major Chinese ports declined by 20 per cent in late January.
Economists project that China’s first quarter GDP growth could slide by 1.5 per cent to 4.5 per cent, while the annual growth rate this year could be as low as 5.5 per cent.
Given that China’s economy accounts for a whopping 19.7 per cent of global GDP, pain in China will hurt the rest of the world. Thailand, for example, is in a conundrum between welcoming Chinese tourists but risking increased transmission of COVID-19, or restricting visitors and suffering an estimated US$1.5 billion loss in revenue. Globally, oil prices declined by 15 per cent and copper was down 13 per cent in early February from two weeks earlier, hurting oil and mineral exporting countries.
Disruptions to global supply chains are also causing production delays and difficulties in fulfilling goods orders. Worse still, if China and the rest of the world fail to stop the spread of COVID-19, a severe global pandemic could see the loss of millions of lives and cost as much as 1 per cent of global GDP. US Secretary of Commerce Wilbur Ross’s comment about COVID-19 in China helping bring jobs back to the United States was neither ethical nor based in economic reality. Governments and international organisations must to combat the epidemic and a potential economic downturn.
Despite the severity of the negative economic impacts, they are likely to be and China’s economy could achieve a quick ‘V-shaped’ recovery. Chinese economic output and domestic demand could rebound as long as the epidemic is contained by the end of March or early April. Based on the experience of SARS and the decelerating growth of confirmed and suspected COVID-19 cases in China, this timeline of containment of the virus is not unrealistic. Still, even if the epidemic only brought short term losses, these losses could cascade into a long-term downward trend for the economy if they are not properly managed.
According to a recent survey of 995 companies, 85 per cent stated that they have enough cash to last for only three months — and 20 per cent planned to cut their payroll. Business failures and layoffs could significantly undercut income and consumption growth, leading to still more business failures and layoffs. To avoid such a downward spiral, the Chinese government must flex its policy muscles and provide assistance to businesses and individuals.
The People’s Bank of China has injected around into the economy through reverse bond repurchase agreements and by lowering the 14-day interbank reverse repurchase agreement interest rate. Major banks have extended more loans and cut loan rates for selected businesses and individuals. This is a welcome measure to provide much needed credit for cash-strapped small- and medium-sized private enterprises. Bond market regulators have also expressed support for bond issuances from businesses that are hard hit by COVID-19. Further cuts of the required reserve…