In the first quarter of 2003, China’s economy experienced its biggest boom in six years, 9.9 percent growth, and more than $13 billion of investment pouring in. However, with the outbreak of SARS in China, many industries have been suffering business losses, especially the service sector. Tourism and travel alone now make up 5.6 percent of GDP. How great is the SARS impact on China’s economy? Economic Analysts seem to have two different general views and specific estimates and forecasts of the SARS impact on the economy still vary widely. This report surveys both the optimistic and pessimistic views in the early economic analysis of the SARS crisis.
I. Optimistic View – Little Impact on China’s Long-Term Economy
The latest statistics from National Bureau of Statistics of China show a positive economic performance based on the major national economic indices. Chinese press reports, citing unnamed sources at the National Bureau of Statistics, indicate that China’s gross domestic product grew 8.9 percent in April, one percentage point lower than the figure recorded for the first quarter of 2003. Industrial output in April rose 14.9 percent year-on-year and investment in fixed assets increased 28.5 percent. Consumer spending rose 7.7 percent in April, as compared with 9.2 percent in March.
A report by Ben Dolven and David Murphy in Far Eastern Economic Review (May 8, 2003) says that China is experiencing a slowdown amid a ‘gigantic boom’. Ben Dolven and David Murphy believe that “Bejing’s convulsions may push the city’s growth to zero in 2003, but analysts put China growth at no less than 6 percent”. In a survey of eight foreign investment banks, the average GDP growth estimate for China this year was 7.4 percent, down from 7.6 percent before SARS outbreak.
In the newly published “Asian Development Outlook 2003”, Asian Development Bank (ADB) predicts that China’s SARS-affected economy will grow by 7.3 percent this year, compared with 8 percent last year. Although ADB has reduced its 2003 economic growth forecast for China by 0.2 percent due to SARS, it forecasts that China’s GDP next year will continue its rapid growth rate of 7.6 percent.
According to a report from Goldman Sachs, the SARS impact on China is temporary and may last for just three months. It won’t have a long-term impact on China’s economy. Although Goldman Sachs has cut its 2003 economic growth forecast for China from 7.5 percent to 7 percent, it maintains an optimistic view of China’s economy.
Supporting Factors:
Although the SARS impact on the service sector, which is 28 percent of GDP, is large, other industries have not been disrupted nationwide.
According to data provided by Goldman Sachs, 54 percent of China’s GDP is from manufacturing, which has seen very little real disruption by SARS. The massive investment in car plants, chip fabs and other industries still looks healthy. Agriculture industry, 13.7 percent of economy, is well insulated from the SARS hit, although there could be some impact on food exports.
Based on the experience of Hong Kong and Singapore, the SARS damage was largely limited to retailers, hotels, regional airlines and small manufacturers who depend on big trade shows to book new orders.
II. Pessimistic View – Risks in Lost Exports and Foreign Investment
According to an article in South China Morning Post (May 5, 2003), the SARS outbreak could cost China up to $17 billion in lost exports and foreign investment, cutting 0.5 percentage points off growth in GDP. It estimates that the loss in exports, especially in the May-July Period, could hit $10 billion with a trade deficit of $5 billion.
Although Goldman Sachs holds an optimistic view of China’s long-term economy, it considers the risk of SARS’ impact on foreign direct investment (FDI). FDI accounts for 30 percent of the overall investment in China. If FDI inflow is cut by one third for two continuous quarters, the impact on China’s GDP could reach 2.5 percent. If such a situation occurs, Goldman Sachs will revise its 2003 economic growth forecast for China down to 4.5 percent.
Citigroup China economists expect that the fall-off in retail sales and export orders will force companies to scale back new investments. Analysts at JP Morgan expect that electronics goods sales could fall by up to 30 percent this quarter.
If SARS extends into the third quarter of 2003, ADB indicated in its new economic report (May 9, 2003) that GDP growth in China will be likely to be reduced by 0.5 percent point to 7 percent, with an estimated $ 5.8 billion reduction in annual GDP level.
Some Chinese analysts from Peking University predict that the economic loss in mainland China due to SARS could reach about $25 billion.
III. SARS Impact on Beijing’s Economy
According to the latest report (May 13, 2003) by the Beijing Municipal Statistical Bureau, retail sales of consumer products increased 14.6 percent year-on-year in April. That growth rate is 9.5 percentage points lower than the figure for March 2003 in Beijing due to SARS. April was a key month for Beijing in the battle against SARS, especially the latter period of month. Beijing Statistic Bureau announced that the SARS impact on Beijing’s economy through April could have reached about $54.5 million in losses. Although an overall decline in the consumer goods market did not appear in April, a future SARS impact cannot be ruled out.
In the latest global economic report by Stephen Roach, Morgan Stanley’s Chief Economist, Beijing is the most service-intensive metropolitan area in inland China. It is estimated that the services industry accounts for 61 percent of Beijing’s economic activity – nearly double the national norm. Since Beijing’s GDP makes up about three percent of the national GDP, the SARS impact on its service-related economy should be cause for concern.
Analysts from China Center for Economic Research (CCER) of Peking University predict Beijing’s economy will take the hardest SARS-related hit, with the possibility of zero economic growth for this year unless "effective measures such as Olympic construction are taken to drive up the economy right after the epidemic". Research done by CCER shows that during the May Day holiday, Beijing, with nearly no tourists, lost $361 million of its domestic travel business. CCER estimates that the fall-out could result in a $3.6–7.2 billion loss to Beijing, or roughly 10 percent of the city’s GDP.
Dr. Hu Angang, from Qinghua University, however, predicts that SARS impact on Beijing’s economic growth could be limited to 0.5 percent. Dr. Hu indicated that Beijing’s economic growth reached 12.7 percent in the first quarter, higher than the national growth rate of 9.9 percent. Beijing could maintain its high growth rate this year. If SARS extends into June, however, its impact on Beijing’s economy could reach two percent for this year. Dr. Hu believes that SARS’ impact on Beijing’s economy depends on how long it takes the municipal government to contain SARS.
Sources:
Asia Development Bank's website: http://www.adb.org
Beijing Municipal Statistical Bureau's website: http://www.bjstats.gov.cn
CCER's website: http://ccer.pku.edu.cn
CCTV’s website: http://www.cctv.com.cn
China National Bureau of Statistics’ website: http://www.stats.gov.cn
People’s Daily’s website: http://www.people.com.cn
Xinhua News Agency’s website: http://www.xinhuanet.com
Business Week, May 12, 2003
China Business Weekly, May 6 – 12, 2003
China Business Weekly, May 13 – 19, 2003
China Times, April 29, 2003
Far Eastern Economic Review, May 8, 2003
International Finance News, May 7, 2003
South China Morning Post, May 5, 2003