China coronavirus could inflict more economic pain than Sars, analysts say

China coronavirus could inflict more economic pain than Sars, analysts say
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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.

The virus, which originated in the central Chinese city of Wuhan but has spread to every province, municipality and autonomous region, has cast fresh doubts on the trajectory of the Chinese economy, from its ability to

support US purchasing demands

as part of the phase one deal or meet Beijing’s goal of doubling gross domestic product (GDP) between 2010 and 2020.

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.

The new pneumonia virus, which on Thursday had killed at least 170 people in China and infected nearly 8,000 around the world, nearing the total number of cases caused by the

severe acute respiratory syndrome (Sars) epidemic

in 2002-2003.

As the disease has spread, government controls to contain the outbreak have seen entertainment, commercial and transport activity across the country grind to a halt, turning the

Lunar New Year holiday, 

which is famed for consumer spending, into a period of silence.

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.

“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.

Larry Hu, chief China economist of Macquarie Capital, said the coronavirus could be a bigger “

black swan

” – a term used to describe unexpected events with serious consequences – for China than Sars given potential damage to consumer sentiment.

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.

Many cities across China have turned into

virtual ghost towns

, with venues ranging from the Forbidden City palace complex in Beijing to nail shops and cinemas closing their doors. Domestic travel has plummeted and international airlines including British Airways and Air Canada have suspended flights to the mainland.

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.

Source: SMCP

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