Coronavirus: A Pause in the Long March

ON JANUARY 17TH, 2020, China announced that its gross domestic product (GDP) per capita had, for the first time, crossed $10,000 in the previous year; a more than 30 times increase in 30 years that transformed an impoverished nation into a comfortably middle-income country in a single generation. Even though economic growth had slowed down to its lowest in 30 years in 2019, at 6.1 per cent, it was faster than India’s and on a GDP base of almost $14 trillion, still very impressive. Only a black swan event could derail China’s continued rise. It might have taken flight in Wuhan.

In the last month, China has been counting the numbers, not of its economic success as was usual, but of the cost of nCOV2019. More than 1,300 people were dead and around 60,000 infected in China, as of February 13th. That may not seem large in a country of 1.35 billion—Wuhan alone has 11 million residents. And the mortality rate from the virus is apparently much lower than SARS which struck China a decade-and-a-half ago.

However, the highly contagious nature of the virus had led to unprecedented lockdowns. Hubei, a province of almost 60 million, at the centre of the outbreak, is in total lockdown. It also contributes $600 billion to China’s GDP and is a major industrial hub. Economic activity is at a standstill. Ironically, China’s economic success has probably catalysed the rapid spread of the virus. China is the world’s fastest growing aviation market. In 2019, around 660 million Chinese travelled by air compared to less than 100 million at the time of the SARS outbreak. The world’s longest high-speed rail network, built in the last 15 years, ferries 1.3 million passengers per day.

This degree of mobility makes it harder to limit the spread of the virus. The inevitable outcome is partial lockdowns (particularly of centres of economic activity like factories, offices, markets) in other parts of China. As the virus spreads, so does its impact on economic activity. Some economists predict that China’s growth for the first quarter of 2020 may be zero.

What happens next depends on how effectively China’s famed state capacity can work to stem the spread of the virus. Few other countries would have the capacity to put a large province (the size and population of many countries in Europe) into a mass quarantine. It is difficult to think of another country which could have built two hospitals from scratch in 10 days with more than 2,000 beds to handle exclusively those affected by the virus. That said, nCOV2019 has also exposed the frailties of the Chinese system. The base instinct to censor and censure meant that the virus got out of hand in the first place when warnings were not heeded, indeed suppressed. A strong state is not necessarily an empathetic one. Crises like these need leaders to soothe anxieties. There is plenty of anger on local social platforms like Weibo. The authorities respond by deleting content frequently, but it is impossible to erase the rage people feel. There are few pressure valves through which the anger can vent. Indeed, the absence of China’s most powerful leader since Mao from the public eye at a time of the greatest insecurity of the people is revealing.

Fundamentally, the single party system of China has survived on an implicit social contract between the Party and the people. The Party delivers economic growth and prosperity. In return, the people give up their freedoms for the greater good. That promise has worked well for 40 years. But it will be tested by the current crisis. What is happening in China right now is the opposite of prosperity and peace; it is a halt in the economy and mass insecurity. The longer it lingers, the more questions will be asked. And that trust between the state and the people, so crucial for China’s rise, may be broken. Therefore, it is in the Party’s interest to stop the epidemic even if it costs a quarter or two of economic growth. The alternative would be much more disruptive. But, in nCOV2019, it has a formidable foe.

Given that China has been the major engine of growth for the global economy, there will be consequences if China were to slow down for a prolonged period. For now, it is difficult to quantify the precise impact on global GDP or the GDP of countries which China does business with (the list includes all the major economies of the world). But there will be consequences. Prices of key commodities including oil, iron ore and copper have fallen in the last two weeks. If the lockdowns persist for long, somewhere around 0.5 per cent of world GDP could be shaved off in the first six months of the year. China matters. It is the world’s largest producer and exporter of goods. In 2003, during the SARS outbreak (which was much more limited than the current one), China contributed just 4 per cent to the global GDP. Now, it contributes 16 per cent. In that sense, China is too big to fail. The next month will tell us whether the mighty Party can tame its micro enemy without dire macro consequences for the world.

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About The Author

Dhiraj Nayyar

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