8 March 2020

The Economic Impact of the Coronavirus Crisis on China

The past year has proven to be a very difficult period for China and that country’s giant economy.  After recovering from the market turmoil of 2015 and 2016, the Chinese economy regained a good deal of stability in 2017 and 2018, thanks in large part to strong growth on the domestic market and resurgent demand growth in key export markets.  

However, the past year witnessed a number of serious threats to the Chinese economy emerge.  For example, the United States’ decision to attempt to rebalance its trade relationship with China by imposing tariffs on most Chinese imports resulted in Chinese exports stagnating in 2019.  Inside China, consumer spending growth, which had generally exceeded 10% per year for the past 15 years, fell to around 8% last year.  Meanwhile, months of serious unrest in Hong Kong posed a serious challenge for Beijing, both politically and economically.  

The Coronavirus Outbreak

Now, a new challenge has emerged, the coronavirus (or the newly-renamed Covid-19) crisis that threatens to cause even greater disruptions to China.  While the greatest threat from the coronavirus comes is to the health and well-being of China’s (and the world’s) population, we will focus here on the economic impact of this crisis, both inside China and around the world.

This outbreak of the coronavirus began last December in the Chinese city of Wuhan (population 11 million) in the central province of Hubei.  The first official cases were reported in that city in mid-January, and, just four weeks later, the number of cases has risen dramatically, with more than 90,000 cases being reported just eight weeks after the first official cases were documented.  Meanwhile, the number of deaths attributed to the coronavirus has also risen sharply, having passed the 3,000 mark this week.  

To put this in comparison, 2003’s SARS outbreak resulted in just under 8,100 cases and 774 fatalities.  So far, the vast majority of these cases and fatalities have been in China, with the largest number of each being found in the Hubei province, where nearly all of the larger cities are now under quarantine.  Nevertheless, cases of the coronavirus have now been discovered in all areas of China, and the number of cases having been found outside of China, primarily in other Asian countries, has risen sharply in recent days.  


The Comparison to the SARS Crisis

The situation that most closely resembled the current coronavirus outbreak is the aforementioned SARS outbreak.  This outbreak originated in southern China and was found to have come from cave-dwelling bats in that region.  As we have seen, the currently coronavirus outbreak has already easily surpassed the SARS outbreak in terms of the number of cases, and while the coronavirus appears to be less deadly, the number of deaths in the current outbreak has also surpassed the number of deaths from the SARS crisis.  

In terms of its economic impact, the SARS crisis was estimated to have knocked three percentage points off of China’s economic growth in 2003, and this came at a time when the Chinese economy was growing at a faster rate than it is now.  Meanwhile, this crisis also had a negative impact on many Southeast Asia economies, while causing severe disruptions for the travel and tourism industries worldwide.  

As China was not as integrated into the global economy and international supply chains as it is today, the global impact of the SARS crisis was relatively limited.  That is not the case today, as the coronavirus crisis is not only causing major disruptions to the Chinese economy, but also to many industries around the world that have suppliers or customers in China, in particular, in central China, where this outbreak originated.

The Best-Case Scenario

For businesses and investors concerned about the impact of the coronavirus crisis on their prospects for 2020, there is a natural search for a best-case scenario.  In our view, the best-case scenario would include a number of developments.  First, the outbreak would have to remain largely contained inside China, with few cases and fatalities occurring outside of that country’s borders.  Second, the fatality rate for the coronavirus would have to remain relatively low, as it is now.  Then, the slowdown in the growth of the number of new cases would have to continue and eventually, this outbreak would have to begin to peter out, hopefully in the next month.  

If this is the case, the impact on the Chinese and global economies should be relatively limited, with economic growth in China falling to around 4% in the first quarter of this year, before rebounding over the remainder of the year, with annual growth of 5.8%.  Likewise, disruptions to global supply chains would be relatively limited, and these disruptions would come to an end sometime in the second quarter of this year.

The Worst-Case Scenario

Unfortunately, there is also a worse-case scenario to consider.  In this case, the coronavirus outbreak would not be contained in China and instead, would spread worldwide, leading to an exponential increase in the number of cases and fatalities.  Under such as scenario, the number of cases could reach the millions, with the number of deaths rising to the hundreds of thousands, if not more.  Meanwhile, the quest to find a vaccine for this version of the coronavirus could prove too long, resulting in its continued spread to new areas of the world.  Worse, it could become a regular occurrence under such a scenario, with the number of cases rising and falling on an annual basis.  

In this case, the impact on the Chinese economy would be devastating, perhaps leading to a prolonged recession in what has been, in recent years, the world’s leading driver of economic growth.  If the outbreak would spread around the globe and the number of cases would rise dramatically, the impact on the global economy would also be severe, resulting in the biggest economic downturn since the global financial crisis in 2008 and 2009.

What to Look For

In the coming days and weeks, there will be a number of signs that will indicate which direction this crisis is headed.  Most importantly, the number of new cases will be monitored closely, as the growth rate for the number of new cases has fallen in recent days (although it remains much too high for comfort).  Likewise, the spread of cases of the coronavirus to countries outside of China will also be watched closely, and this will determine whether or not China’s efforts to keep the virus from spreading outside of its borders has been successful.  At the same time, as more countries and territories close their borders to travelers from China, it will be crucial that the number of new cases of the coronavirus outside of China does not rise too fast.  As we move forward, expect more events inside China, and potentially in neighboring countries, to be cancelled or postponed in a bid to stem the spread of the coronavirus.  

In the coming weeks, we should have a better understanding as to what the scale and scope of this crisis will be.  Then, we will be able to determine whether or not the coronavirus will be a temporary setback for the Chinese economy, with relatively little international impact, or whether this will be a massive blow to the world’s second-largest economy, and a significant disruption for the global economy and many of its most important industries.