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Novel Coronavirus: A Limited Economic Impact

Feb 14, 2020
  • Ding Yifan

    China Forum Expert and Deputy Director of China Development Research Center

As the novel coronavirus epidemic continues in China, people are wondering about its impact on the economy.

Generally speaking, it has had a certain impact on growth, especially in the service industry. The Spring Festival holiday used to be a golden season for services, where every sector benefited from the mass movement of people.

But this year, people are afraid to use public transportation. Airlines, railway companies and long-distance bus and other passenger transport companies will all suffer great losses, as will the catering and hotel industries.

In addition, the epidemic has brought serious losses to the cultural and entertainment industries. Many new movies were scheduled to make their debut. Many new dramas would require theater attendance and various exhibitions were in preparation. In addition, the epidemic diverted interest in traveling to other countries from China, and the decline in foreign tourists coming to China has brought massive tourism losses.

The government is subsidizing hard-hit areas with money, as the service industry relies heavily on cash flow. The catering industry, for example, now has no customers. The government grants tax exemptions, encourages rent reductions and asks financial institutions to help fund companies in difficulty, which can partially make up for the losses.

But there’s good news. The impact of the novel coronavirus on China’s annual GDP growth may not be as severe as many expected, because it’s calculated on the basis of both investment and consumption. From the perspective of the government accounting ledger, the nominal growth of GDP may not be hurt much.

But there’s more to this picture. Think about it: How much material and manpower has been invested in building emergency hospitals, sending a large number of doctors, nurses and various other personnel to front-line cities for the emergency? We also need to strengthen the review of human and material resources between cities, including such things as physical quarantine equipment. Such activities are also counted in GDP, so they will make up for some GDP growth.

Of course, these “make-ups” measure quantity only. By contrast, if we look at the quality, this sort of GDP growth is not something to praise.

When SARS broke out in 2003, everyone expected that economic growth would decline significantly, and rumors on the internet said economic growth would decline by several percentage points. In fact, China’s economy reached a growth rate of 10 percent. Comparing today with previous years, there hasn’t been much change. It was a few months after the SARS epidemic broke-out that the transportation and tourism service industries saw the effects. When summer came, the epidemic ended, the SARS virus evaporated, the economy began to grow strongly again and the service sector quickly recovered.

This time, because of the outbreak in the first quarter, GDP may have fallen by 1 to 2 percentage points, but if the epidemic is controlled in the second quarter, GDP will rebound rapidly. Otherwise, we will have to wait until the third quarter for the economy to rebound.

The decline in Chinese demand is bad news for the global commodity market, and prices of raw materials will fall.

China is an important part of the world’s industrial supply chain and the largest supplier of industrial components. If the epidemic affects Chinese production, it will also affect the processing industries in other countries, thus hurting global economic growth.

U.S. Secretary of Commerce Wilbur Ross said the Chinese epidemic would help U.S. manufacturing companies come back home and so is beneficial to revitalizing the U.S. manufacturing sector. This is pure wishful thinking. Investment in the manufacturing industry is based upon long-term development trends, at least 5 to 10 years out. Industrial investment doesn’t bear fruit overnight, nor can it be moved away overnight.

The plague will soon pass. When the situation improves, production will resume, supply chains will reconnect and everything will return to normal.

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