BOFIT Viikkokatsaus / BOFIT Weekly 2020/06

The coronavirus outbreak, first reported at the end of last year from Wuhan, the capital and largest city in Hubei province in Central China, has now spread to all provinces of China. Isolated cases have also been reported in over two dozen countries. The vast majority of the cases are in Hubei province, which has a population of 60 million people and accounts for about 5 % of China’s GDP. Wuhan and other cities in the province have been under quarantine for weeks.

There are also extensive measures elsewhere in China to prevent the spread of the epidemic, as well as limits on travel. China’s week-long Lunar New Year holiday was extended by three days throughout the country to February 2. In most provinces, non-critical production facilities have remained closed this week. The affected provinces and metropolises (including Guangdong, Beijing and Shanghai) account for about 80 % of China’s economic activity and 90 % of exports. Many internal migrant workers who travelled during the holiday season have been unable to return to the cities or towns where they work. Schools remain closed throughout the country. Tourist destinations are also shuttered and group tours have been suspended.

The economic impacts have been significant, especially for the service sector, because the epidemic struck during the Chinese New Year holidays. The National Development and Reform Commission reports that the number of New Year’s travellers fell from 421 million last year to just 190 million this year. The transportation ministry reports that, in comparison to the 2019 New Year’s holiday, the number of riders on trains and buses declined this year by around 70 %, while domestic air travel was off by almost 60 %. Businesses that profit during the holidays had to close. By some estimates restaurant and retail sales were off by about half from pre-coronavirus projections.

Financial markets plunged at their opening on Monday (Feb. 3). Most shares listed on the mainland China stock exchanges fell by 10 %, the limit at which trading in that share is suspended for the day. The yuan’s exchange rate also declined. As the week wore on, however, currency and share prices recovered part of the Monday’s drop. Media reports say that state-backed actors have been requested to support the markets as needed.

Several provincial governments have announced plans to support firms that have lost business due to the epidemic, offering such breaks as reduced or postponed tax payments and financial support to firms that do not lay off workers. Officials have instructed financial firms to support the economy by easing access to financing and lowering loan costs. At the beginning of the week, the PBoC increased market liquidity through its open market operations. The yields on reverse repo agreements used in the central bank’s liquidity operations were cut by 10 basis points. Further monetary and fiscal policy easing measures are expected.

The economic impacts of the coronavirus are still difficult to judge due to the unknown extent of measures to limit the virus’ spread or the duration of the epidemic. Most international forecasting institutions expect the coronavirus epidemic to cause a further slowing in China’s GDP growth this year on the order of 0.5 percentage points, assuming the epidemic is brought under control within a few months. First-quarter growth is expected to decline by 1–2 percentage points and recover thereafter.

The situation is reminiscent of the another coronavirus outbreak, the SARS (severe acute respiratory syndrome) epidemic of 2003, which saw on-year growth in China’s GDP and retail sales slow briefly by few percentage points and then recover quickly. The current epidemic is expected to have a larger impact, as the importance of the service sector (accounting for 59 % of GDP growth today compared to 39 % in 2003) and final consumption expenditure (58 % of GDP growth today vs. 35 % in 2003) in the economy have grown since 2003. Traditional stimulus measures such as investments in infrastructure have lost their potency as a means to reviving growth. Should the epidemic continue for a longer time, there is the danger that the already deteriorated economic and financial conditions of many firms could set off a vicious downward spiral.

The coronavirus epidemic is presently expected to cut 0.1–0.3 percentage points off global economic growth this year. In addition to the slowdown in Chinese demand and the resulting impacts on global commodity and financial markets, prolonged shutdown of manufacturing facilities in China disrupts international production chains that may further drag down global economic activity.

Chinese economic policy, which is dominated by growth targets, has long been accommodative. Even if the impacts on growth from the epidemic are short-lived, stimulus measures will be costly. From the stimulus standpoint, however, the situation is not comparable to the SARS epidemic. China today is in the midst of an economic slowdown and government debt is considerably larger.