The outbreak of the novel coronavirus has posed a new challenge for China, and particularly its economy, which is still reeling from its slowest growth in three decades after a prolonged trade war with the United States. Apart from its economic impact, the virus threatens the tight grip of the Chinese Communist Party over its citizens as well as Beijing’s standing in the region.
The virus, now officially designated as Covid-19, has already infected more than 105,000 people worldwide and has caused over 3,500 deaths globally, over 3,000 in China alone. Quarantines and other restrictive measures enforced by Chinese authorities to contain the virus are severely handicapping the economy, with spill-over effects elsewhere in Asia and around the world.
Local authorities have already locked down Wuhan and several other cities. Most local governments in Hubei province have enhanced control of entry points including airports, railway stations, highways and waterways, turning parts of the country into virtual landlocked islands. Among the most restrictive measures are those in Wenzhou, the city worst hit by the virus outside Hubei and a major hub for China’s maritime trade.
All this has affected the Chinese economy, as major sectors such as transport, airlines and tourism, trade and investment, hospitality and retail, insurance, and manufacturing absorb the consequences of restrictions. Road trips this year compared to last year after Chinese New Year have reduced by 78 per cent, indicating the delayed return of some 300 million migrant workers back to cities. This has affected manufacturing as Chinese and foreign corporations struggle to resume production as a result of a workforce shortage, particularly migrant workers. The latter are particularly badly hit as they deal with widespread prejudice against them as perceived carriers of the virus and because New Year is usually when they seek new employment.
Technology giant Alibaba has said that the virus has changed buying patterns, with consumers pulling back on discretionary spending, including travel and restaurants. China's overall consumer price index, which had been at 1.5 per cent in January 2017 and between 2 and 3 per cent during most of 2019, leapt to 5.4 per cent in January 2020, as residents hoard essential items. Many airlines have chosen to cancel or reduce flights while trade shows and sporting events have been cancelled or postponed.
Ripple effects of this are being felt on global supply chains. Provinces most affected by the virus are home to nearly 50,000 branches or subsidiaries of foreign corporations, including nearly 9,500 American ones. As a result, big corporations reliant on Chinese suppliers are facing production and sourcing troubles including major automakers such as Hyundai, Nissan, Volkswagen, Toyota, General Motors, Renault and Honda. Moreover, Foxconn, a major electronics producer for Apple, has said it will be the end of the month before even half of its facilities are operating.
Official growth rates last year showed a 6 per cent increase in GDP, the lowest for China since 1990. With clouds of the U.S.–China trade dispute still hovering, and now the impact of the coronavirus, many expect growth to slow to 4.5 per cent in the first quarter of 2020.
The current coronavirus outbreak dwarfs the 2003 SARS outbreak, which killed a reported 813. Since the SARS outbreak, not only has the Chinese economy grown bigger, but it is also more integrated with the world economy. In 2003, China’s GDP was USD 1.6 trillion as compared to its current USD 13.6 trillion. Coronavirus is bound to affect foreign investment too, as there will be weariness and caution among investors as they actively seek alternatives to avoid commercial and other risks.
Another sector to be impacted is the Chinese defence industry, as companies such as Jiangnan Shipyard in Shanghai, Wuchang Shipbuilders and the PLA Naval University of Engineering in Wuhan and Shenyang Aircraft Corp. in Liaoning have temporarily shut down their operations. These units are in charge of critical weapons platforms for the PLA such as aircraft carriers, submarines and fighter jets, which will adversely affect the PLA’s modernization plans. The outbreak of the virus has also meant that the PLA recruitment schedule starting from March 2020 has been forced to be rescheduled.
Interestingly, coronavirus has also given rise to anti-China sentiments in many countries. In Pakistan, for instance, where thousands of Chinese engineers and other workers are stationed for the China-Pakistan Economic Corridor project, locals are demanding the screening of Chinese workers. A makeshift hospital is being set up in Karachi to quarantine those returning from China before they are allowed to go to the Thar coal block plant, where about 700 Chinese are employed. While in Central Asia’s Kazakhstan, residents reportedly ransacked a local hospital earmarked for Chinese patients.
Clearly, as the virus spreads, pressure mounts on Beijing to take additional measures. Chinese officials are scrambling to contain the fallout. Given Beijing’s earlier attempts to cover up the spread of coronavirus, there will be greater pressure on Chinese authorities to demonstrate transparency regarding all factors relating to the virus. Meanwhile, China will need to inject substantial financial incentives into the economy to balance against commercial and optical risk so as to maintain its regional and global standing.