The Covid-19 virus has killed 1775 people with a total of 71,442 infected as of 17 Feb. Of these 70,548 were in China, 454 in the cruise ship Diamond Princess and the rest spread out, mainly in the Asia-Pacific. The good news is that by official count, infections outside Hubei province have declined for 13 consecutive days.
In Hubei itself measures have been tightened. By new rules all businesses will close and the province’s 58 million people will not be able to leave their residential community or village. Further workers returning from their villages and home towns are being compelled to undertake a mandatory 14-day quarantine.
The Chinese authorities are confronted with a double whammy, on one hand, they need to keep their economy going and on the other, they must institute strict measures to prevent the spread of the disease. Prognostications are that the economic damage done by the Covid-19 outbreak will be limited, the fact is that it has already caused havoc with the Chinese economy. And this is before we even have an accurate estimate of when the outbreak may end.
Writing in the Communist Party Central Committee’s Qiushi magazine Chinese Finance Minister Liu Kun acknowledged that China would face decreased revenues and increased expenditures in the wake of Covid-19. But he signaled that China won’t simply rely on a stimulus to restore its economy, but use “policies and capital in a more effective, precise and targeted ways.”
One way of measuring the impact of Covid-19 is to compare with the SARS virus which was considered more malevolent, even though it killed less than 800 people. It caused an estimated $ 50 billion damage to the global economy. The Chinese economy today is four times larger and the impact on the global economy will be that much larger. So, a rule of thumb calculation could be that the damage is four times greater. But, says The Economist, SARS may not be the best guide because not only is China’s economy a larger proportion of the global GDP, but “it has become enmeshed in supply chains of mind boggling complexity and just-in-time production leaves little room for delays.”
The structural change in the Chinese economy since the SARS outbreak has seen a shift away from manufacturing and exports to services and consumption. This means that the quarantine measures imposed in varying levels across the country will have an impact because of the consumers staying away from markets, restaurants, air travel, transport entertainment and tourism. While the measures are severe in Hubei province, especially Wuhan, other provinces too are seeing partial lockdowns. Some 30 of 31 provinces have declared a public health emergency with major cities and economic hubs being effectively shut down for weeks. This has put millions of jobs in a limbo, especially in the hotels, restaurants, hotels, and retail industries.
Last week, when people returned to work from the Lunar New Year Holiday, that the impact of the Covid-19 outbreak on the economy was beginning to tell. LvYue group a tourism and resort company announced a cut in working hours and salaries of staff at the executive and above level by 30 per cent. The company employs thousands to run around 1900 hotels and hostels across the world.
The government has announced a series of measures to prevent this and has expanded the range of firms who can get subsidies for “stabilizing employment.” So small firms who do not lay off more than 5.5 per cent of their employees will still qualify for subsidies, while micro firms that employ less than 30 people, the ratio has been hiked to 20 per cent. A survey by Tsinghua and Peking Universities of Beijing found that 67.1 per cent of the 995 small and medium sized enterprises they surveyed said that their reserves could only sustain operations for two months if they had no revenue at all. 30 per cent said that their revenue could shrink by at least half over the figure for 2019.
Despite the shift to domestic consumption, China remains a key manufacturer and its lockdown is having a global impact. As The Economist pointed out that Apple’s reliance on China is such that it shuttled as many as 50 executives between California and China every day, till Covid-19 and the suspension of flights to China brought this to a grinding halt. Apple issued a rare earnings warning on Monday saying it would not be to meet its quarterly revenue expectations because of the impact of the virus on its production demand in China.
We do not know how the Covid-19 episode will play out in the coming months, but it will certainly call for a relook at the vulnerabilities of big multinationals who have come to rely on China by shaping their inventories on a “just in time” philosophy.
Hubei province and Wuhan itself have important global connections. On one hand, it is an important centre for automobile and auto-components industry and on the other, some 25 per cent of the world’s optical fibre cables and devices are made there.
Meanwhile the ripple effects of the virus have affected the economies of South-east Asia as well. First, by the suspension of Chinese tourism, second by disrupting supply chains linked to production centres in China and third by dampening economic demand in China. This is also affecting North-east Asian countries like South Korea and Japan which have invested in China and South-east Asia.
Countries like India are also bracing for the disruption of the global supply chain because China manufactures the key ingredients for those drug, the so-called Active Pharmaceutical Ingredients (API) for paracetamol, anti-asthma drugs, antibiotics, statins, hormones and steroids, as well as crucial vitamins. Europe, too is confronting this challenge because even though it is one of the world’s top manufacturers of drugs, it obtains its API from China or India.
Even though many companies have reported that they are already up and running by 14 February, there are issues with staffing. Only 21.8 per cent of the 109 companies surveyed by the American Chamber of Commerce(AMCHAM) in Shanghai said that they had enough staff to run the full production line.
There is a bottom line here. When you look at the outbreak, the delays in reporting it, the manner in which the Chinese state has handled it, it becomes clear that the system created by the CPC, one based on promoting “social stability” and the control of the Party, may have had a dangerous role in allowing the spread of the virus unchecked for an unconscionable amount of time. In a critique penned on February 4, Xu Zhangrun, a professor at Tsinghua University in Beijing squarely blamed the authoritarian system in China for failing to deal with the virus. He said that the “ultimate concern of China’s polity today and that of its highest leader is to preserve at all costs the privileged position of the Communist Party and to maintain ruthlessly its hold on power.”
The latest Qiushi magazine published Xi’s February 3 speech to the Politburo Standing Committee (PBSC) and the remarks suggest that Xi was aware of the virus on or before 7 January. Apparently despite his instructions the Hubei authorities dilly-dallied. It was only on 20 January that the Wuhan authorities acknowledged that the virus could spread from human to human.
As of now there is no indication that the incidence of the virus has peaked—when the daily number of cases declines consistently. But one thing is certain, China’s economy has taken a hit which will take some time to recover. China will certainly have to overhaul its mechanisms for epidemic prevention and control. With the world economy, especially Asia, so much more dependent on Chinese demand, it is in our interest to ensure that everyone learns the right lessons from the Covid-19 outbreak.
The views expressed above belong to the author(s). ORF research and analyses now available on Telegram! Click here to access our curated content — blogs, longforms and interviews.
Manoj Joshi is a Distinguished Fellow at the ORF. He has been a journalist specialising on national and international politics and is a commentator and ...
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