An outbreak of a novel coronavirus appeared in Wuahn, China just ahead of the Lunar New Year holiday, the period of the largest annual human migration on Earth. What if the most terrible scenarios about the coronavirus come true, and the disease outpaces the measures taken by the international community and China itself? The peak of the new epidemic in China may come in February; with that in mind, let us think about the possible geopolitical and geoeconomic consequences.
The coronavirus outbreak coincided with an economic slowdown as China contends with rising debt, cooling domestic demand, and aggressive U.S. tariffs. The 6.1 percent GDP growth rate for 2019 was near the bottom of Beijing’s target range, and sharply down on the previous year’s 6.6 percent. On January 15, China and the United States signed an interim trade deal, the first steps toward the end of U.S.-China trade war. But the celebration was short-lived, as just a few days later the severity of the coronavirus began to become clear.
An outbreak in China’s Industrial Heartland
Wuhan, the capital of Hubei province, is at the center of the Chinese industrial heartland. Looking at a map, this city is located in the very middle of the “Industrial Square” of the country, the area bounded by Beijing/Tianjin, Chengdu/Chongqing, Macau/Hong Kong, and Shanghai. Hubei province is home to seven crucial economic zones: Hubei Jingzhou Chengnan Economic Development Zone; Wuhan East Lake High-Tech Development Zone (China’s largest production center for optical-electronic products); Wuhan Economic and Technological Development Zone; Wuhan Export Processing Zone; Wuhan Optical Valley (Guanggu) Software Park is in Wuhan East Lake High-Tech Development Zone; and Xiangyang New and Hi-Tech Industrial Development Zone. Wuhan in particular boasts the largest river-port in China and the largest airport of Central China.
Whereas in the national economy of China saw a growth slowdown in 2019, Wuhan saw higher growth at 7.8 percent. According to the Hubei provincial government, “The added value of high-tech sectors and digital economy are estimated to account for 24.5 percent and 40 percent of the [Wuhan] GDP.” Wuhan’s prospects looked bright for 2020 as well. As the Hubei government noted, “Over 300 of the world’s top 500 companies have settled in Wuhan. The number of newly-added high-tech companies hit a record high with a net increase of about 900.” The government work report – delivered at the 14th Wuhan Municipal People’s Congress, ironically as the outbreak was gaining steam – estimated that the GDP of Wuhan would grow between 7.5 percent to 7.8 percent in 2020, with 220,000 new jobs created.
Just a few weeks after this rosy outlook was given, the terrible pictures from Wuhan seem to many people in the world to be images from Hollywood apocalyptic movies. If the outbreak expands, it could bring the fabric of the global economy to a halt. Beijing has already demonstrated that it is able to mobilize millions of people for the goal of containing the virus and simultaneously isolate millions of others from their families and friends. Hubei province, with a population of 58 million of people, has essentially been cut off from the entire country.
Compare Wuhan to California or, more precisely, to Silicon Valley and imagine the harm done to the national and global economy if the state was effectively shut down for weeks on end.
Foreign and international companies react
In a less dramatic scenario, when Beijing eventually soon triumphs over the virus, the harm to the Chinese and global economy might not be so great. For example, during the 2003 SARS outbreak, China’s retail sales growth bottomed out at 4.3 percent, but promptly rebounded and the third quarter growth clocked in at 9.7 percent. Similarly, passenger transport fell by 42 percent and 22 percent in May and June 2003, respectively, before bouncing back in September. But there is potential for the outbreak to seriously harm the Chinese economy and consequently the global economy.
Japan’s Nissan and French groups PSA and Renault have stressed that they were going to stop production in China and would pull their foreign staff from the country. Global equity markets and oil prices are reacting rapidly to the events in China: S&P 500, Nasdaq, and Dow indices all dropped by 1.5 percent or more on January 27 amid coronavirus fears. The Shanghai Composite Index dropped from its maximum of 3.115 on January 13 to 2.978 on January 23.
According to Andrew Milligan, head of global strategy at Aberdeen Standard Investments, “Even on the assumption that the authorities do get on top of this outbreak, there will be some short-term economic shock.” But, he added, “That is a long way from saying the outlook for global markets will be materially different. It’s still early days.” However, the general vision of many financial experts is that short-term investors can be negatively impacted by the political and economic effects from the coronavirus.
As a case study, Alibaba Group Holding Ltd. provides a clear example of how the virus is already harming the Chinese economy. Alibaba is a symbol of contemporary China as superpower; its name is synonymous with Chinese economic might. Unfortunately for Alibaba, the coronavirus now strikes at the very heart of its identity. In almost in every country, there are new stories about citizens fearful of deliveries from China – including from the most famous Chinese company, Alibaba Group. As a result, the company’s stock price has dropped from $231 on January 13 to a low of $2035 by January 28.
SARS, Coronavirus, and GDP
The Economist Intelligence Unit estimates the novel coronavirus outbreak in China could reduce real GDP growth in 2020 by 0.5-1 percentage points. The first economic victims were air carriers and travel companies; the travel and tourism industries will be hit hard. However, some sectors like pharmaceutics, e-commerce, and automotives could benefit. The EIU’s projected growth rate for China was 5.9 percent, and if epidemic reaches the status of SARS, Chinese GDP can drop to 4.9 percent. The coronavirus has already infected more people than SARS did, but the latter was deadlier: SARS in 2003 killed 650 people while the current outbreak has a death toll of 171.
It should be noted that in 2003 the Chinese GDP was $1.6 billion versus $14.3 trillion in 2019. In 2003 Chinese economy was the seventh-largest; now it is the world’s second largest economy. The role of China in the global market is indispensable.
In 2004, a year after the SARS outbreak, the U.S. National Academy of Sciences published a report on “Learning from SARS.” In it, scientists calculated the global economic loss from SARS at close to $40 billion in 2003. “This is a figure much greater than any calculation of the medical costs of treating SARS patients,” the report noted.
In addition to purely humanitarian motivations, Beijing is trying to head off the most dangerous consequences of the epidemic so that it does not deliver another crushing blow to the economy, as experienced in 2003. The numbers show how great the consequences are. In 2019, during the Chinese New Year holiday, retailers and restaurateurs profit exceeded $148 billion, and tourism revenue exceeded $76 billion.
The talent-deficit problem
The consequences will run deeper than lost revenue, however. Since 2010, China has started to think about international prestige in terms of soft power, especially in the education and attraction of talented people from around the world. So far, China worked hard to change its image and invited as many foreign students and talented specialists as possible. In 2017-2018, there were just under 12,000 U.S. students in China (including 1,000 in Wuhan) compared to over 360,000 Chinese students in the United States. In 2019, there were 21,000 U.S., 20,000 Russian, 10,600 French, and 14,200 Japanese students in China. According to the China Ministry of Education, in Hubei province alone there are 21,371 foreign students.
Now all of China’s success in attracting foreign talent in the last decade could be ruined by the spreading of this deadly virus. European and North American countries have initiated the process of evacuating their nationals from Wuhan, where a quarantine is in effect. If the coronavirus reaches a mass scale in other provinces, we are going to witness organized flights from China on an unprecedented scale, to Western countries particularly.
Geopolitical implications
As it has already been stated, the coronavirus is spreading amid the U.S.-China trade war and a general slowdown of the Chinese economy. In order to tackle such great challenge, China needs to mobilize the resources of the entire nation and its 1.4 billion people. And yet those resources must now be diverted to fight an epidemic, which could eventually force the Chinese economy into “hibernation” and even necessitate a temporary withdrawal from world politics. The geopolitical as well as economic consequences could be huge in the nearest future if Beijing determines that, given the dramatic situation, temporary seclusion is the best measure.
Cruel as it sounds, the United States is the biggest beneficiary of the crisis. The Chinese economic slowdown will continue and it is still unclear how large the impact will be from the current crisis. Temporarily, the balance of power might temporarily shift back in the United States’ favour.
Currently, groups of sovereign countries are striving for independent foreign policies, which often contradicts the U.S. vision. In particular, Iran, China, Russia, and now Turkey are sure that when they join in one “axis,” all members are capable of resisting the Americans and the West in general. But if one country is pushed out, especially from the tripartite China-Russia-Iran axis, the global balance of power would tilt in favor of the West. Thus, the seclusion of China from the outside world would be a nightmare for Russia and Iran especially.
- The Diplomat
