China: The Coronavirus Damage

Published on January 30, 2020

On Tuesday, the National Development and Reform Commission (NDRC), China’s highest macroeconomic planning agency, submitted its preliminary assessment of the economic impact of the novel coronavirus outbreak to China’s State Council, headed by Premier Li Keqiang.

*** From what we understand, the NDRC believes China’s GDP will drop in Q1 2020 by 1.5 percentage points to 4.5% from 6% in Q4 of 2019, based on certain assumptions about the spread of the disease. Most critical of those assumptions is that the spread of the 2019-nCoV epidemic reaches a turning point before February 15 — and is brought substantially under control by the end of February.  ***

*** Officials expect, or hope, that if the epidemic can be controlled by the end of February, its impact on the country’s economy will be “minor and short-lived,” felt mainly in Q1 data. The NDRC, while an economic body, expressed confidence that China will be able to control the spread of the epidemic as planned. ***

*** If, however, it is not contained over the next month, they believe its impact will be considerably more severe than the damage already expected. In particular, if the crisis extends beyond February, the NDRC believes it will significantly affect not just consumption and industrial production, as it already has, but also bleed deeply into investment and foreign trade, and undermine investor confidence in China. ***

Under the latter scenario, the assessment by China’s top economic body is that it would be impossible to then hit the “around 6%” GDP target set at the end of last year for 2020.  Some private forecasters may feel that to already be the case.

Shutdowns Banking on February

To avert even further damage, Beijing has enacted a series of high-profile and aggressive measures, placing the containment of the virus as a priority over considerations at this point concerning the economic fall-out from these measures, and at the ready for “strengthened macroeconomic policy” stimulus when needed (see SGH 1/27/2020, “China: Assessing the Wuhan Coronavirus”).

Those measures include multiple closures, all seemingly with an eye towards a hoped for turn in the spread of the virus around mid-February.

After the State Council decided to extend the Lunar New Year holidays to February 2, over half of China’s provincial-level administrative divisions, including Shanghai, Guangdong, Jiangsu, and Zhejiang declared that all enterprises will remain closed until February 9, and that all schools will remain closed until at least February 17 to strengthen the prevention and control of the novel coronavirus. China also delayed the reopening of its equity markets until February 3.

Dubious Comparisons to SARS

Chinese officials (and some stock market bulls) somewhat hopefully point to three comparisons between the current outbreak and the SARS epidemic of 2003 in making a case for why it may prove to be a short-lived phenomenon, at least economically:

One is that for all its virulence, the impact of SARS was felt dramatically in Q2 of 2003 (6.7% GDP), after which the Chinese economy continued on its then upward (9%-plus) GDP trajectory through 2003.

The second, and widely known data point, is that the mortality rate for the novel coronavirus is expected to be around 2-3%, as opposed to a mortality rate of about 6% for SARS.

The third point is the swift and decisive measures President Xi Jinping has authorized this time around to contain the epidemic, for example shutting down the entire city of Wuhan after reportedly 20 days of the outbreak, as opposed to the far less transparent or timely response by the government authorities to SARS when that first broke out.

But for each point, there is a counterpoint negating such comparisons to SARS: the almost benign manifestations of coronavirus adding to the rapid spread of the disease, the absolute explosion in the volume of global travel in and out of China between 2003 and now, the communication revolution in the intervening 15 years that spreads both information and fear, the enormous growth of corporate multinational ties into the Chinese economy on both the sales and production side, to cite just a few reasons we would shy away from drawing any quick parallel between Coronavirus today, and the SARS virus in 2003.

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