The worst timing for the Chinese economy
The outbreak of the new coronavirus certainly occurred at the worst time of the year. It began to spread rapidly during the Chinese New Year, a time of year when China typically sees a boost in household consumption and tourism. The Chinese government later ordered a household self-quarantine to contain the spread of the virus. Because of this, consumption and tourism in China has experienced a continuing downturn. Most e-commerce companies including Alibaba have suspended their purchase and delivery operations due to government directives. Furthermore, the government has indefinitely locked down Wuhan city, which is a major transport and manufacturing hub. The authorities have also blocked roadways to reduce travel around the cities in China.
At this time, the government is redirecting its resources to the health and construction sectors to provide more resources to combat the virus. In Wuhan for instance, the epicenter of the epidemic, the government has built a new hospital in 10 days to accommodate thousands of infected patients in the city. It is still a question, however, whether this shifting of government resources will compromise the development of other industries in China.
Industries operating in Hubei province or even in larger cities like Shanghai have felt the impact of the coronavirus crisis. For instance, Tesla was forced to close its new factories in Shanghai. It is also reported that Apple, more than most companies, stands to lose out from the coronavirus outbreak. Moreover, investors are cautious about buying or selling their holdings, which may directly affect the flow of foreign investments in China.
Are coronavirus and SARS alike?
The current coronavirus outbreak (COVID-19) is reminiscent of the SARS epidemic in China back in 2002. According to Oxford Economics analysts, “The coronavirus epidemic could potentially have a high but short-lived impact, comparable to the SARS episode.” However, “the current situation is hardly comparable to that of the SARS crisis.” This pertains to the improved ability of China to combat a health crisis.
During the SARS period, the Chinese healthcare system was not as efficient as compared to today. Also, a major part of the population did not have access to healthcare, which could only make the situation worse on a national scale. Nowadays, Chinese hospitals are equipped with better facilities and high-performance devices. They are also more advanced in terms of medical response and treatment.
However, the overwhelming number of patients poses a challenge. Though the government is building new hospitals with incredible speed, the number of cases is also growing rapidly. Thus, China must ensure that its facilities can cater to the increasing number of patients.
The following graph published by the Chinese government shows the number of cases (in red); the number of people suspected to have the disease (in orange); and the sum of the two last components (in blue).
The effects of SARS brought China’s economic output to a temporary slowdown. Despite that, China’s growth had picked up by 9.3% in 2003 and restarted the following year with double-digit growth. Depending on the evolution of the COVID-19 and the development of a cure against it, China’s economic development is expected to slow down in six months. However, it will eventually recover thereafter (given the Chinese economic situation over the last 3 years).
The show must go on
Even though there is a fear of an economic slowdown in the short-term, there is no need to worry about business prosperity in China. Presently, Chinese consumption comprises a large portion of its economy (57% of the GDP). Thus, consumerism remains core to the Chinese economy. The epidemic will not change the actual Chinese economic structure and people’s habits. After the peak of the disease, Chinese household consumption will grow again and the Chinese economic machine will restart.
GDP growth (annual %) – China
Source: The World Bank
A lesson from the SARS crisis
Indeed, after the SARS crisis in 2003, the Chinese GDP has significantly increased. China continues to push the One Belt, One Road Initiative and is still one of the first economic powerhouses in the world. After SARS, many new companies came to China to do business. Thus, an entrepreneur should see crisis recovery as an opportunity to find new suppliers and new clients.
To conclude, the managing partner of S.J. Grand, Stéphane Grand, has this to say:
“The SARS crisis was a terrible time to be an entrepreneur, just like the Coronavirus is bound to be one. Of course, you will have to slash costs, reduce your burn rate to the bare minimum and reconsider all unnecessary expenses. However, this time of reduced activity is also a time for introspection that you will not be able to carry out otherwise when business is booming.”
Read more on China Business in times of Coronavirus, an entrepreneur’s lessons from SARS by Stéphane Grand.