Breakingviews - Epidemic impact will simulate China mini-recession

Passengers wear protective masks following the outbreak of a new coronavirus, in a MTR train in Hong Kong, China February 4, 2020. REUTERS/Tyrone Siu

HONG KONG (Reuters Breakingviews) - The Wuhan virus could spark China’s first recession-like experience. With quarantines depressing consumption, whole industries are at risk of severe hits. Officially GDP growth will stay positive, but for a generation that has never experienced a normal economic cycle, this downturn may provide a realistic simulation.

The People’s Republic has weathered emergencies before, including the SARS epidemic in 2002 and the 2008 global financial crisis. In both cases, the country was able to outgrow the impact using state-driven investment.

As Beijing now confronts the coronavirus, its economy is more mature, more indebted and thus more vulnerable. Consumption, not exports, account for the bulk of GDP growth, while yields from infrastructure investment have naturally diminished. China’s leading companies are domestic e-commerce operations run by tech giants such as Alibaba and Tencent.

Consumption is harder to kickstart with policy easing, especially when everything is under quarantine. UBS economist Wang Tao has cut her consumption growth estimate for this year to 5% from 6.8%; a government economist said the crisis could knock estimated growth down a full percentage point to 5% in the first quarter of 2020.

And that’s the optimistic case. It could take months for health authorities to control the outbreak, and a year or more to discover and distribute a vaccine. In the meantime, the private sector, which creates four out of five jobs, is under duress. Jia Guolong, who runs the popular Xibei restaurant chain, told local media that his 400 stores are closed; he only has enough cash for three months, and called for tax amnesty and wage subsidies.

Layoffs are one big risk; real estate is another, directly and indirectly driving as much as a fifth of economic activity. But the coronavirus has frozen transactions, making it hard for developers to service their mountains of expensive debt. Local governments, for their part, need to sell land to developers to offset the fiscal impact of tax cuts, and to pay off their own bondholders. If buyers don’t come back to market, the ensuing property cash would amplify the economic crisis.

The financial impact of the SARS crisis was short-lived, but there was no trade war, nor was corporate debt 154% of GDP. Even if the coronavirus gets controlled quickly, it will deliver China a painful, but perhaps educational, economic experience.


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