China’s economy safe despite SARS

While SARS has selectively spread, a sense of sudden panic that
has spread worldwide.

The psychological pressure and resulting economic damage caused
by the fear of the virus is more damaging than the virus
itself.

Some are concerned that SARS will not only lower China’s
economic growth at least 1 to 2 percent in the current year, but,
even worse, affect public confidence in China’s government
and China’s economic growth. Some have gone so far as to say
that the impact of SARS upon China’s economy will be
comparable to the Asian Financial Crisis in 1997. But how serious
is the actual damage? Let’s look at the facts.

It is unavoidable that in the short run SARS will have a
negative impact on China’s economy. However, it is believed
that SARS will not be prolonged for much longer. If the epidemic
can be successfully controlled within the next few months, which
appears likely, the public confidence can probably be regained, and
the “normal life” will be gradually restored.

The daily SARS report, released by the Chinese government, notes
a gradual decrease in both new and suspicious cases within the
nation, including the hardest hit areas like Beijing. This is
obviously the result of the government’s earnest isolation
and cure measures, as well as extensive preventive actions in the
community (e.g. disinfections in personal living areas and
inspection of body temperature in public spots). Furthermore, air
temperatures have risen, which will help diminish SARS propagation.
Therefore, if the current trend continues, SARS is likely to be
controlled within the next two to three months.

One must speculate as to the short-term, economic impacts of
SARS, considering that SARS was not controlled in its initial
stages and that the public is exhibiting little confidence in
prevention. Corporate investments have declined and consumers have
reduced economic activities, due to their fears of being infected
and quarantined. Production has been hindered by sick leaves,
quarantining and death.

However, if SARS can soon be eliminated, the aforementioned
impacts will quickly lessen. Once consumers are ensured that they
are no longer at risk for contracting SARS, there will be a flurry
of purchasing as consumers try to “catch up.” Their
desires to consume will erupt in order to compensate the
constraints they’ve experienced over the past few months.

The impact of SARS on China’s economy is manifesting
itself in foreign economic relationships, including foreign trading
and foreign merchant investment. Still, being an extremely large
nation, China is primarily affected by domestic factors. External
factors may affect China’s economy, but the economic momentum
and development the country has achieved over the past ten years
means the external environment is less important to China than it
is to other countries.

Moreover, despite the onset of SARS, the first quarter economic
growth of China was +9.9 percent ““ much stronger than
expected. This is in addition to an obvious growth in investment
demand, consumption demand and national demand. Clearly, the
outbreak of SARS will not be able to terminate China’s
economic growth, but only to marginally and initially slow down its
economic performance.

SARS will have only a modest negative impact on foreign direct
investment into China. Although the Chinese government’s
initial secrecy in taking measures against SARS has been greatly
criticized by some of the the foreign media, such comments have not
yet caused a significant number of investors to alter long-term
investment plans. For the foreign investors who have been doing
business in China for many years, a single incident would not cause
any significant changes in their investment decisions.

Although potential investors have cancelled their visits to
China or delayed their business negotiations, investment decisions
will ultimately be affected by long-term factors, such as the
markets, labor force, costs, etc. In general, investment decisions
are quite time-insensitive. While investment negotiations may be
temporarily suspended, international firms will not stop investing
in China.

Once the government can assure investors that SARS is under
control, investors will quickly regain confidence and proceed with
investment plans. For example, recent articles indicate that
illustrious companies such as GM have no intention of altering
their long-term investment plans in China. In spite of SARS,
China’s first quarter GDP growth reached nearly 10 percent
““ a rate not seen for several years, even in high-growth
China.

SARS seems to have paradoxically improved some sectors of the
domestic economy, and spurred economic growth. Preventative
enhancement actions taken by the government appear to have
stimulated the national economy. Historically, the national
economic growth has shown a slight drop when the government
presents personnel shifts, but, during the latest shift, economic
growth has actually accelerated. This clearly predicts a fresh boom
of China’s economy.

Leading industries, such as the motor, food, coal and machinery
industries, appear to be growing strongly at this time in the boom
cycle. Other booming industries include medicine, some parts of the
textile industry, disinfectants and telecommunications.

Despite a slow start, one should not underestimate the ability
and capability of the Chinese government to control SARS from
spreading. China is now aggressively acting to stop the spread of
SARS.

Forecasts predicting the slowing of China’s economic
growth will be tempered and modified as it becomes apparent that
SARS is under control. China will soon resume its phenomenal
economic growth. And, if there is a silver lining to the human
tragedy of those infected, it is that public health investment in
China will undoubtedly increase in the years ahead, further
assisting economic growth and protecting citizens from a variety of
public health threats.

Huang is chief operating officer of the Shenzhen Stock Exchange
in China, and currently a visiting scholar at the Anderson School
at UCLA.