- The Wuhan virus has markets roiling and Chinese officials rushing to stop its spread. Dozens have been killed and thousands infected across the country. Cases of the virus have also been found in the US.
- Its impact on the Chinese economy will be significant, given that the virus is spreading during Lunar New Year — a time when consumers spend a lot of money.
- And the longer it drags down economic growth, the more Chinese policymakers will be tempted to return to their best trick to juice up the economy, raising the possibility that property markets could overheat.
- This is an opinion column. The thoughts expressed are those of the author.
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For those who follow markets, starting the year with volatility emanating from China is all-too familiar. For years the country’s bubbly behavior — especially in its over-heating property markets — gave markets convulsions almost like clockwork.
But then, it seemed, policymakers got something of a handle on things. They worked to put a lid on property market speculation while engaging in targeted stimulus measures to support vulnerable sectors of the economy during the trade war. It was a delicate balance.
The Wuhan coronavirus outbreak could threaten all of that.
The longer the virus goes without being contained, the more of a drag it will put on the economy. Analysts at Societe Generale estimate that if the spread of the virus “fails to stabilize” by March, first quarter GDP growth could fall below the 6%, the Chinese government’s target.
“Without doubt, the hit would be most significant on domestic consumption and tourism-related sectors across the nation,” Societe Generale analysts Wei Yao and Michelle Lam wrote in a recent note to clients.
“We could see first quarter retail sales growth decelerate by 0.5 [percentage points] to 7.2%, compared with our current forecast of 8%. Given the increased weight of consumption in the economy, the drag on overall growth from such a consumption shock would be more significant than in 2003, all other things being equal.”
Lessons from SARS
As Yao and Lam pointed out, the Chinese economy has changed significantly since the country last experienced a major outbreak. It’s bigger, more consumption driven, and way more laden with debt.
The policy guidelines laid down last month at China’s 2019 Central Economic Work Conference articulated how China planned to move the country forward under those conditions, while maintain the delicate balance I mentioned before.
The plan was to keep credit flowing, but to make conditions especially easy for private business and small and medium-sized enterprises (SMEs). At the same time policymakers would focus on fixing zombie companies — mostly big state owned enterprises (SOEs) — and weening them off their addiction to credit. In order to make sure property markets stayed cool, policymakers also committed themselves to stressing that buying property was not for speculation.
That plan, combined with improvement in industrial and manufacturing sectors due to the end of the trade war, had many analysts — including Yao and Lam — thinking China’s economy would remain stable for the first half of 2020.
The Wuhan virus throws that into question. Wuhan is the capital of Hubei province, an important manufacturing hub in China that represents 4% of the country’s GDP. Putting the region on lockdown will likely slow industrial production, which had just bounced back to 6.9% in December from 6.2% in November.
The longer this virus spreads the more policymakers may feel compelled to ease credit conditions across the board, not just for SMEs and private enterprises. Yao and Lam wrote that a cut of Chinese banks’ reserve requirement ratio or interest rate cuts would all be in the cards. The would just make credit easier, adding to China’s debt bubble and potentially opening the door to more property market speculation.
Unfortunately, these things happen to even the best laid plans.