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Effects of coronavirus hit the Chinese economy

An investigation into the economic costs of coronavirus in China and beyond

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THE ECONOMIC COST of coronavirus is mounting, but not only in China. The virus originated in Wuhan, a city with a population of 11 million, which is now on lockdown, preventing business-related travel as well as the movement of goods and workers. This lockdown has now been extended to other parts of the Hubei Province.

Domestically, the impact can already be seen. Fear of the virus means that many people will choose to avoid activities that may expose them to risk of infection; restaurants, cinemas, transport providers, hotels and shops are quickly feeling the impact. The New Year holiday has been extended for a few days by the national Chinese authorities, with longer extensions imposed by some provincial authorities, delaying the return to work for some businesses even longer.

It is especially difficult for manufacturers selling goods abroad, with buyers becoming more reluctant and sceptical to buy from China. The economic impact is not solely confined to China. Many international retailers, such as Ikea and Starbucks, have closed operations in China. Furthermore, several overseas airlines have stopped flights to China and international hotel chains have been offering refunds. There is growing concern about integrated international supply chains, as China has a much bigger role in these networks than it did at the time of the last major health problem that emerged from the country.

The stock markets around the world have taken a hit and are lower than they were two weeks ago. China’s market fell by 8 percent on the first day of trading after the holiday, and there has been a marked impact on the prices of industrial commodities. This is because China is an important buyer. The price of crude oil hit its lowest level in more than a year, dropping about 15 percent in the past two weeks. This reflects a declining demand from China, underlined by reports that the country’s leading refiner, Sinopec, is cutting back. Furthermore, a group of oil exporting nations is considering production cuts in an effort to reverse the price fall.

Copper has also taken a hit, with a price drop of around 13 percent over the past two weeks. Copper is an important material for the construction industry, which is also sure to be affected in China. Many suppliers of these commodities rely on Chinese demand and are often emerging and developing economies. Much of the impact will depend on how well the Chinese authorities are able to contain the virus. Forecasters from the consultancy firm Oxford Economics predicts that the Chinese economy will grow less than 4 percent in the first quarter of 2020 from a year earlier, with a full year forecast showing an average growth of 5.6 per cent. The previous pre-virus forecast was 6 percent. However, this is based on an assumption that the “worst case scenario” will be avoided, therefore the risk of economic damage could be more severe.

A slight silver lining is that the markets have rallied together after Beijing unveiled a plan to halve extra levies on 1,717 US products. China is to halve additional tariffs on 1,717 goods following the signing of a phase one trade deal that halted the trade war between the world’s two largest economies. This has been seen by analysts as a move to boost confidence amid the coronavirus outbreak that has disrupted businesses and dented investor sentiment. Following this move, the Yuan hit the highest level in two weeks, while Asian stocks and Wall Street futures also rallied. While the proposed tariff cuts point to clear progress in US-China trade ties, the virus outbreak has cast doubt over just how soon the phase 1 deal could help China’s slowing economy.

China has become an indispensable part of global business, and since the 2003 SARS outbreak it has grown into the world’s factory, driving demand for commodities. The country also boasts hundreds of millions of wealthy consumers who spend big on luxury products, tourism and cars. In 2003, China’s economy accounted for roughly 4 percent of world GDP, it now makes up 16 percent of the global output. SARS affected 8,098 people and killed 774 before it was contained, while the new coronavirus has already killed more than 700 people and infected over 34,300 across 25 countries and territories.

According to S&P Global Ratings, the outbreak will force car makers in China to slash production by about 15 percent in the first quarter, with Toyota saying on Friday it would keep its factories shut until at least 17 February. The British brand Burberry has also been impacted following the closure of 24 of its 64 stores in mainland China, with its chief executive warning that the virus is causing “a material negative effect on luxury demand”.

A study by the World Bank suggests that a severe pandemic could cause economic losses equal to nearly 5 percent of global GDP. Although the Wuhan coronavirus has not been declared a pandemic by the WHO, a World Bank report from 2013 suggests that “a severe pandemic would resemble a global war in its sudden, profound, and widespread impact”.

China’s government has countered the economic fallout from the coronavirus and the measures taken to contain it. The People’s Bank of China cut key interest rates this week and injected huge amounts of cash into markets in order to help take the pressure off banks and borrowers. Officials have announced new tax breaks and subsidies designed to help consumers. It is clear that due to its high levels of debt, China is now more vulnerable to crisis.

The coronavirus is yet another setback for the Chinese economy after a disappointing performance over the last 18 months. Last year, the Chinese economy grew by just 6.1 percent, a significant level by the standards of European economies, however it was the slowest rate of growth in 29 years for the Chinese economy. Long term factors have contributed to the slowdown in China’s growth, including the increasingly ageing population of China’s populous, as well as the effects of the US/China trade war. The significant effects of the outbreak won’t be felt for another three weeks, due to lag effects in the Chinese supply chain, but invariably the outbreak of the virus will further contribute to the slowing of growth in China.

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