China’s leaders are bracing for a blow to first-quarter economic growth as the deadly coronavirus weighs on consumption, travel and manufacturing, with some cities extending the lunar new year break by nearly a week. The virus, which originated in the central Chinese city of Wuhan, has led authorities to cancel events across the country for the normally week-long lunar new year period, which started on Saturday.
As of Monday morning, the coronavirus had killed at least 80 people and infected 2,744, leading authorities to impose an unprecedented lockdown on a population of about 40m around Wuhan in Hubei province. The financial capital Shanghai has ordered companies not to reopen until February 9 while the manufacturing hub of Suzhou has postponed the return to work of millions of migrant labourers for up to a week.
Suzhou is one of the world’s largest manufacturing hubs where companies such as iPhone contractor Foxconn, Johnson & Johnson and Samsung Electronics have factories. Underscoring concern among policymakers over the economic fallout from the outbreak, China’s banking and insurance regulator announced moves to help businesses affected by the crisis.
Companies would receive support “through measures such as encouraging appropriate lowering of loan interest rates, improving arrangements for loan renewal policies and increasing medium-term and credit loans”, the China Banking Regulatory Commission said. Oil dropped below $60 a barrel for the first time in 2020 after authorities warned the spread of a deadly coronavirus would accelerate.
The timing of the outbreak has presented a two-fold threat to leaders in Beijing, who are under global pressure to manage the crisis in a transparent and timely manner. Not only has the outbreak hit during the Chinese new year, when people make billions of trips to visit family, it also comes as the country is reporting its lowest rate of economic growth in nearly 30 years.
For President Xi Jinping the crisis represents another major challenge on top of a popular uprising in Hong Kong, a swine fever outbreak that has wiped out millions of pigs and fuelled inflation, and the trade war with the US. The toll on travel from the coronavirus outbreak has already become evident in statistics released by the government on Sunday. Railway transport on Saturday, the first day of the lunar new year, fell about 42 per cent compared with the same day last year, according to the transportation ministry. Passenger flights were down by roughly 42 per cent and overall transportation across the country declined about 29 per cent.
“The timing could not have been worse as hundreds of millions of Chinese are returning home for family reunions or are on leisure travel ahead and during the Chinese new year,” said Priyanka Kishore of Oxford Economics. Ctrip, China’s largest online travel group, said on Monday it had asked global travel operators to refund passengers who wished to change their travel plans.
“The coronavirus makes a pronounced slowdown even more likely and if the disease is not brought under control quickly, then even our downbeat forecasts may turn out to be too high,” said Julian Evans-Pritchard, senior China economist at Capital Economics.
Retail sales, consumer demand and tourism are the first areas expected to be affected. The east gate of Beijing’s Forbidden City is a popular destination for holiday merrymakers during the lunar new year. However, on Sunday, the second day of the traditional festival, the area was quiet. “It’s normally very busy at this time of year but the outbreak has stopped people from coming,” said an employee at a souvenir shop in the area, surnamed Xu. She noted with a hint of optimism that this outbreak would pass and tourism in the area would recover, just as it did following the spread of Sars in 2003. “Just wait until it gets warmer.”
Sars, which killed nearly 800 people, knocked quarterly economic growth down by two percentage points, from 11.1 per cent in the first quarter of 2003 to 9.1 per cent in the second quarter. Economists said China’s economy has changed since Sars. “The big trend in 2003 was that China’s economy was at an early stage of an export upcycle when Sars broke out,” Macquarie China economist Larry Hu said in a note. Despite Sars, exports grew 35 per cent year on year in 2003.
In 2019, the economy grew by just 6.1 per cent. Exports over the past two years have been hurt by the trade war with the US. Consumption, which is now under pressure from the outbreak, has become a far more important source of stable economic growth for the country. “Everything depends on how rapidly it spreads and how serious it gets, but in principle this could have a serious impact on consumption,” said Michael Pettis, a finance professor at Peking University and senior fellow at Carnegie-Tsinghua Center.
“People are not going out to restaurants and bars.” But economic policymakers will have less room to tinker with fiscal policy this time around, compared with the Sars outbreak. “After the Sars epidemic, China adopted an expansionary fiscal policy including tax cuts to help with the recovery of the sectors most affected,” Tianlei Huang, an analyst at the Peterson Institute of International Economics, wrote in a note. “Today China is running large fiscal deficits and thus has less room to apply fiscal stimulus as it did last time.”