China's coronavirus health crisis is also a threat to its economy

Barely a month after the first case of the deadly coronavirus surfaced in the city of Wuhan in central China, the spreading deaths and illnesses have confronted the Chinese leadership with the country's biggest public health crisis in nearly two decades. Adding to the tragic human toll,¹ the health crisis is certain to take a toll on China's slowing economy, accompanied by losses already recorded in Chinese stock markets.

The widespread disruptions to the usual massive travel during the Lunar New Year have dramatized the potential economic damage of the health crisis. Millions of Chinese travelling abroad and within the country during the holiday are suspending their plans out of concern that the disease could spread elsewhere. China, meanwhile, has taken the unprecedented step of closing Wuhan, a city of more than 11 million, for those leaving the city by public transportation. Wuhan, the largest city in central China sitting at the confluence of two of China's major rivers, is also one of the largest transportation hubs in the country.

The last time China was hit by such a major public health crisis was during the 2002–03 outbreak of the Severe Acute Respiratory Syndrome, or "SARS" as it is popularly known. SARS also first appeared in China and soon spread worldwide, killing nearly 800 people mostly in China and Hong Kong. In hindsight, the economic if not the health impact of SARS turned out to be perhaps smaller than many feared at the time. China's economy was still booming at 10 percent in 2003, the highest since 1995. Second quarter growth in 2003 was affected most severely, dropping to 9.1 percent, about 1.3 percent lower than the average growth in the other three quarters in the same year.²

Transportation, hospitality, retail, and entertainment sectors are likely to suffer the most from the coronavirus outbreak. Local authorities in Wuhan have now shut down transit within and out of the city indefinitely. Similar lockdowns have also been imposed in the neighboring cities of Huanggang and Ezhou, an unprecedented move unseen even when SARS was at its peak in 2003. Officials from the National Health Commission of China have issued a warning that advises against travel to Wuhan. The World Health Organization (WHO) and a number of countries and multinational organizations have also issued travel advice on China. The impact on public mobility is rapidly spreading nationwide and could soon become worldwide if the outbreak of the pneumonia-like illness keeps spreading at its current pace.

After the SARS epidemic, China adopted an expansionary fiscal policy including tax cuts to help with the recovery of the sectors most affected. Today China is running large fiscal deficits and thus has less room to apply fiscal stimulus as it did last time. On monetary policy, the central bank might step up liquidity support, but there will be no credit-fueled stimulus. Though the economic impact of the novel coronavirus will depend on how well the health crisis is contained, and particularly how the Chinese government handles it—not least on how transparent the government is on these matters—the toll could exacerbate China's economic slowdown, which was previously forecast by PIIE to deliver 5.9 percent growth this year.

Notes

1. See the Wuhan Coronavirus Map at the New York Times for the latest numbers.

2. See an account of the economic impact of SARS by China International Capital Corporation (CICC).