China coronavirus could inflict more economic pain than Sars, analysts say
- The coronavirus outbreak has cast fresh doubts on the trajectory of the Chinese economy, with economists saying the fallout could be worse than Sars
- China is already grappling with record low economic growth and the disruption is likely to hit investment and production, analysts say
The outbreak of a novel coronavirus in China is increasingly viewed by analysts as posing a greater threat to growth in the world’s second biggest economy than that of the Sars epidemic more than 15 years ago.
It has come as the country’s growth rate hit its lowest level in nearly three decades, slowing to 6.1 per cent in 2019.
While there are hopes it may only have a short-lived impact on economic growth, much like that of Sars, analysts say circumstances have changed drastically since the beginning of the 21st century, meaning the disease could leave much deeper scars.
Zhang Ming, a researcher at the Chinese Academy of Social Sciences, said in the case of an “optimistic scenario” where the outbreak was brought under control by late March, China’s GDP growth rate in the first quarter could still drop below 5 per cent.
Since 2003, China’s main drivers of growth have shifted from a reliance on external demand and capital spending to domestic consumption and services. Even if the degree of damage on consumption and services was similar to Sars, the negative impact on the economy would be “significantly higher”, Zhang said.
“In 2003, China was in an upwards economic trajectory; but China’s economy now is in a downward trend,” Zhang wrote in a note.
The years following the Sars outbreak were witness to China’s most rapid economic growth, thanks to its entry into the World Trade Organisation in 2001, a vast cheap labour force and frenzied infrastructure investment and property development.
China’s GDP in 2019 was about nine times larger than that of 2003 in current prices. The value of China’s retail sales, a general measure of market size, in 2003 were roughly the equivalent of 40 days in 2019.
At the same time, China is more vulnerable to shocks like an epidemic that restricts the movement of people and cargo. The services sector, which accounted for less than a third of the national economy in 2003 is now worth more than half.
Li Xunlei, chief economist of Zhongtai Securities, a securities brokerage, said while the coronavirus would not change the country’s “economic rise on the international stage”, its impact on the domestic economy “shouldn’t be underestimated”.
The virus may slow down China’s services growth by one percentage point for 2020, therefore dragging down overall GDP growth by 0.5 percentage points, said Li, who is also an adviser to the Chinese government.
Even if the outbreak peaks in late February, an immediate rebound would be unlikely, Li said. He added the disease could worsen a labour shortage in China’s economic powerhouses – including the provinces of Hubei, Zhejiang and Guangdong – and that economic acitivty “can’t return to normal” as migrant workers could shun the areas.
Potential cuts or delays in international orders for Chinese goods as a result of the outbreak could add further pressure to growth, Li noted.
It could also be more damaging to the global economy, Hu warned.
“The world today is much flatter than 2003 and China is a lot more integrated into the global supply chain … any potential disruption could cause a shortage of components and the impact would be amplified by the whole supply chain,” Hu wrote in a note.
The Chinese government has yet to give an official estimate of the economic losses from the outbreak, but anecdotes across the country have indicated they will not be light. Starbucks has closed more than 2,000 shops in China, while furniture retailer Ikea has closed all of its outlets.
Local governments, including in Shanghai, have ordered factories and construction sites to close until at least February 10 – a decision that is set to affect investment and industrial production in the coming months.
Disruption to Chinese retailers, restaurants and tour operators over the Lunar New Year period is likely to cost hundreds of billions of yuan.
Nomura economists led by Ting Lu wrote in a note on Wednesday that the Wuhan coronavirus “may hit the economy harder than Sars” in 2003. They said China’s real GDP growth rate in the first quarter of 2020 could be dragged down by more than two percentage points from an estimated level of 6 per cent.
The Chinese government has not announced a change in its economic policy, namely a prudent monetary policy and proactive fiscal policy, in light of the coronavirus. However, Beijing may have to turn to monetary easing and larger fiscal deficits to help the economy, analysts have said.
“By China’s official numbers, China’s fiscal deficit could exceed 3 per cent of GDP in 2020,” Zhang at CASS noted.
