Observer: Why the economic impact of nCov-2019 on China will be temporary and limited

By Ni Tao,  People’s Daily app

As of Sunday, the overall number of confirmed cases of nCov-2019 infections on the Chinese mainland reached 17,205, and a total of 361 people had died of the disease.

Amid the epidemic’s outbreak, China’s stocks plunged more than 8 percent at market open as trade resumed on Monday after the Spring Festival holiday. Experts believe there are many irrational factors behind the pessimism, including panic caused by the “herding effect.”

Across the globe, this sentiment has also been reflected in some media’s reports, suggesting concerns that the economic impact on China could be severe.

However, as the fundamentals of China’s long-term and high-quality economic growth have not changed, several investment banks including Swiss UBS have also indicted the epidemic’s economic impact will be temporary.

Why will the impact be temporary and limited?

First, the epidemic’s impact is mainly inflicted on the first quarter, during which the Chinese Lunar New Year is celebrated. Usually, the proportion of Q1’s economic growth in the whole year is relatively lower than other quarters.

Though it is imprudent to judge the economic impact of the epidemic by historical experience, some analysts have compared the nCov-2019 outbreak with the 2003 SARS epidemic and made economic loss projections on this basis, with the presumption that the economic blow this time will be much bigger.

It’s true that the SARS resulted in a sharp decline in China’s GDP growth in the second quarter of 2003, but the negative impact was largely offset by higher growth in the following two quarters, and the annual growth rate was about 10 percent.

It’s also important to notice that today’s Chinese economy is not what it was 17 years ago. It is much bigger, healthier and more balanced in structure. China’s current economic strength, resources and ability to deal with emergencies have all been significantly strengthened since that time.

Second, economic activities after the epidemic will much likely be stronger than normal, to a certain extent, to make up for the gap left by the economy during the epidemic.

The epidemic will surely put a damper on the services sector, especially such consumer industries as tourism, catering, entertainment and logistics.  It will also harm the manufacturing sector in the mobile phone, automobile, and electronic industries, as well as the trade sector.

On the other hand, the epidemic will not completely eliminate economic activities, but instead largely bring about a postponement of economic activities.

For instance, if you don’t travel during the Spring Festival, it doesn’t mean you won’t travel, but you’re likely to reschedule at a later time. Once the epidemic disappears, consumption of goods and services that can be delayed will rebound.

A report released Saturday by the Shanghai Institutes for International Studies noted even in the short term, the epidemic has not caused a negative effect on all the sectors but has benefited industries such as electronic commerce and online games and entertainment.

From the supply-side, the short-term impact is reflected in a pause of some production activities. Once the epidemic subsides, production will resume, with above-normal efficiency and speed.

Third, China has adopted a series of robust macro polices to support the economy and boost confidence.

In an epidemic, small and micro enterprises, because of their small scale and weak anti-risk ability, may face difficulties. Among them, the continuity of the capital chain is the biggest risk.

On Monday, China’s central bank sent a powerful message about its intent to support the economy, with a larger-than-expected injection of $173.8 billion of liquidity into markets and a deep 10-basis-point cut to its regular reverse repos.

This open market operation will drive the overall interest rate down, which is conducive to reducing the cost of capital, easing the financial pressure on enterprises, and supporting the real economy, especially small and micro enterprises.

Meanwhile, fiscal policy has also been utilized. As of Monday, China’s Ministry of Finance has earmarked a total of about $769.8 million to support local governments across the country to prevent and control the epidemic.

On Sunday, the city of Suzhou, East China’s Jiangsu Province,  announced measures including financial support and tax cuts to help  affected small- and medium-sized firms. Many other cities in China have also offered similar favorable policies.

At the moment, the most urgent task for China is to put the epidemic under control, which will bring confidence and vitality into the Chinese economy.

In its latest economic forecast in January, the International Monetary Fund (IMF) revised upward China’s 2020 gross domestic product (GDP) prediction to 6.0 percent from the previous 5.8 percent.

Gerry Rice, director of the IMF’s communications department, believes that China is a large economy with the resources and the resolve to effectively meet the challenge of the nCov-2019 outbreak.