The coronavirus outbreak will dent Chinese growth figures. But Chinese markets are resilient and dynamic monetary policies can lead to a hasty recovery.
As the number of coronavirus cases, or COVID-19, surges past 69,000, its impacts are trickling across Chinese markets. With consumer consumption down during Lunar New Year, the service and hospitality industries have seen profits depleted at one of the busiest times of the year.
Analysts like Citi, Macquarie and the Economist Intelligence Unit have trimmed 2020 growth projections. However, much depends on the government’s ability to contain the virus in the coming weeks and months.
The 1997 Asian financial crisis and the 2003 SARS epidemic both offer a glimpse of what the road to economic recovery might look like in Chinese markets.
Consumers and workers are staying home
A statement from Chinese tech giant Alibaba revealed the impact the viral outbreak has had on Chinese markets. The corporation reported reduced productivity in the manufacturing sector as factories closed and workers were encouraged to stay home. Discretionary spending in restaurants and movie theatres was also down.
Alibaba’s Chief Financial Officer Maggie Wu said: “While demand for goods and services is there, the means of production in the economy has been hampered by the delayed opening of offices, factories and schools after the Lunar New Year’s holiday.”
The severity of the impact across China’s economy will depend on how long it takes Chinese authorities to contain the spread of the virus. Some models expect infection figures to peak at the end of February. However, if the outbreak persists, the rising costs of healthcare and quarantine measures will limit government spending power. This could disrupt infrastructure projects and further slow China’s gross domestic product (GDP) growth. However, it is still too early to assess the full scale of the damage.
China has been through similar periods of uncertainty in the past
In 1997, the Asian Financial Crisis caused panic across China’s financial markets. Investors were hesitant to purchase from China and many Asian currencies shed their value against the dollar. US short-sellers targeted vulnerable currencies, driving values lower and putting the currencies under further pressure on the forex trader.
The Chinese government was under immense pressure to devalue its currency against the US dollar. Foreign investment effectively evaporated as overseas buyers dropped their orders.
In 2002, an outbreak of severe acute respiratory syndrome (SARS) emerged in Guangdong Province. By February the following year, the health crisis had spread nationally. In the eight months until the outbreak was brought under control, the Chinese government was forced to dedicate government spending on border controls, passenger screenings, and healthcare.
What will recovery look like this time around?
By the end of 2003, the Chinese economy was well on the way to recovery. China’s growth domestic product (GDP) grew by 9.4% in the 12 months immediately following the SARS outbreak.
At the time, Chinese supply chains provided more than half of the world’s cement and 36% of the world’s steel. Its dominance in the supply of raw materials buoyed the recovery efforts.
The Chinese economy of 2020 is a different beast. The service sector is the country’s new growth engine. Also, the urbanisation process has left the country more reliant on its transportation sector. Therefore, the economy is more vulnerable to coronavirus than it was to SARS.
On the other hand, the Chinese economy was in a strong position at the end of 2019. Consumer confidence figures were at a ten-year high. There are strong indications that if the Chinese government can bring coronavirus under control in the coming months, there will be pent up consumer demand that, once released, could ease the economic pressure in Chinese markets.
Additionally, China has established strong global freight traffic networks with hubs in the EU, Russia, Latin America and Africa. The conclusion of the upcoming China-EAEU free trade agreement could see the addition of an additional US$100 billion of bilateral trade between China and Russia, allowing the Chinese economy to trade out of its troubles, as it did in the wake of 1997.
The Chinese government can use its fiscal and monetary policy to hasten recovery
Following the spending drought, the Chinese government could implement recovery-friendly fiscal and monetary policies. Pushing commercial lenders to take a lenient stance towards troubled businesses struggling to make loan repayments would help preserve liquidity. The adoption of short-term targeted lending practices would help steer financial resources to the areas of the economy where they are needed most.
Lower interest rates would also help financial liquidity and hasten the return to normalcy.
The Chinese economy has proven its ability to bounce back from periods of severe economic distress in the past. Despite the different economic circumstances surrounding the 2020 coronavirus outbreak, Chinese markets have demonstrated resilience. Trade enhancements on the horizon and strong infrastructure networks will help China trade out of the economic trough and post strong 2020 and 2021 economic showings.