By Zhong Feiteng (Director of the Department of Great Powers Studies at the National Institute of International Strategy, Chinese Academy of Social Sciences)
On January 30, the World Health Organization (WHO) declared the novel coronavirus outbreak in the Chinese city of Wuhan a Public Health Emergency of International Concern (PHEIC). In a world in which all countries are interdependent and linked by the same value chain, any fluctuation of the second largest economy can create major uncertainty in global markets.
Limited Impact on China’s Economy
Already, many internationally renowned economic institutions have released preliminary estimates of the impact of the coronavirus outbreak on the economy. On January 31, Kristalina Georgieva, managing director of the International Monetary Fund (IMF), reported that the novel coronavirus would have negative consequences on the performance of China’s economy in the first quarter, but that it is still premature to accurately gauge its impact before the end of the first quarter. On January 21, in the World Economic Outlook report released in Switzerland, the IMF revised China’s 2020 growth forecast from 5.8 percent to 6 percent.
On February 3, the World Bank and the IMF said that the Chinese government has the capability to manage the epidemic and that they are confident in the resilience and policy space of China’s economy. In a speech in Paris on February 5, Christine Lagarde, chief of the European Central Bank and former managing director of the IMF, said that while the threat of a trade war between China and the United States appears to have receded, the coronavirus adds a new layer of uncertainty to the global landscape. According to the research of epidemic economics, epidemics can cause a severe negative impact on an economy in the short term, but the impact is usually muted in the mid and long term. This trend conforms to the forecast of Wei Shangjin, former chief economist of the Asian Development Bank. He commented on January 28 that if the epidemic is contained by April, it will exert only a limited impact on the Chinese economy, probably a 0.1 percentage point decrease in China’s GDP this year.
The forecasts of major international economic organizations have been mostly consistent with those from the Chinese government. The impact of the epidemic on China’s economy will be determined by the progress and effectiveness of prevention and control efforts, and it still seems that “the impact is episodic and temporary and won’t change the general positive trend of the Chinese economy in the long run.” When predicting the coronavirus impact on China’s economy, international institutions like the IMF usually use the 2003 SARS epidemic as a benchmark. According to statistics released by the IMF, China’s GDP grew by 10 percent in 2003, 0.9 percentage points higher than in 2002. From 2003 to 2012, the annual growth rate of China’s GDP averaged10.6 percent, and the figure was 6.9 percent from 2013 to 2019.
Data released by the National Bureau of Statistics of China on January 17 showed that China’s GDP reached nearly 100 trillion yuan (US$14.3 trillion) in 2019, with per capita GDP surpassing US$10,000 for the first time. The annual GDP growth rate hit 6.1 percent in 2019, and the year-on-year growth in the first quarter of that year was 6.4 percent. At current market prices, China’s GDP in the first quarter of 2019 accounted for 22 percent of the total of the year. The share of the first quarters of the three years from 2016 to 2018 was 21.8 percent, 21.9 percent and 22 percent, respectively. That means the fluctuations of GDP growth rate in the first quarter would create less impact compared to the other three quarters of the year. If the epidemic is contained in the next few months and the Chinese government introduces proactive economic policies thereafter, the coronavirus outbreak will only leave a limited impact on China’s economy.
Mounting Uncertainty in the World Economy
Although the novel coronavirus outbreak could only cause a fleeting impact on China’s economy, any major fluctuation in the world’s second large economy will significantly influence the global economy through supply and industrial chains. China’s share in the world economy had increased from 4.3 percent in 2003 to 16.3 percent in 2019. If evaluating the impact just based on China’s economic aggregate in 2003, it’s easy to fall into the trap of linear contrast. In 2019, China’s economic aggregate was about US$14.1 trillion. In this context, a 0.1 percentage point drop would result in a loss of more than US$14 billion. Given that China has become the world’s largest goods trading country and contributes more than 30 percent of world economic growth, the spillover effect of fluctuations in China’s economy can’t be underestimated. For instance, the novel coronavirus outbreak has caused a sharp contraction in China’s transportation sector, which led to a rapid drop in the country’s demand for oil. To address the situation, the Organization of the Petroleum Exporting Countries (OPEC) decided to reduce oil output.
Today, Chinese tourists make more than 160 million outbound trips each year. The coronavirus epidemic happened to break out during the Spring Festival holiday, a peak time for outbound travel of Chinese people. From that angle, the epidemic has exerted a major impact on tourism and civil aviation in China’s neighboring countries which are popular destinations for Chinese tourists. According to statistics released by the Japan Association of Travel Agents, 400,000 group travelers from China are expected to cancel planned trips to Japan before March. Countries more dependent on tourism such as Vietnam, Cambodian and Thailand may suffer even greater losses.
But the most severe uncertainty is impact on the supply chain of the manufacturing sector. According to The World Development Report 2020 released by the World Bank, a prominent feature of today’s global economy is that intermediate goods account for 70 percent of the world’s total trade, which is more evident in East Asian economies. In the months to come, the negative impact of the epidemic on countries such as Japan, South Korea, Singapore, Vietnam and Indonesia will grow. Considering their increasingly closer connections to China in fields like textiles and electronics, countries like Bangladesh and Cambodia will also be affected. Wuhan, the epicenter of the outbreak, is a major automobile manufacturing base, and many manufacturers in China have opted to remain idle. In this context, the global automobile industry will also suffer a heavy blow.
Before the outbreak of the novel coronavirus, China-U.S. trade friction was affecting the global supply chain, and some enterprises started moving their manufacturing bases from China to countries like those in Southeast Asia. The epidemic has spread globally, with confirmed cases reported in more than 20 countries and regions around the world. Developed countries are taking rigorous measures to strengthen quarantine inspection, and some even cut off air transport with some regions of China. However, if countries around the world fail to make concerted efforts to stop the epidemic, global trade in parts and components will suffer greater losses, adding new levels of uncertainty to the 2020 global economy.