China in Transition
The Effect of SARS on the Chinese Economy
Chi Hung KWAN
Consulting Fellow, RIETI
Severe Acute Respiratory Syndrome (SARS), a new strain of pneumonia and the cause of which is unknown, is currently spreading worldwide, especially throughout mainland China and Hong Kong. According to the World Health Organization's announcement on April 29th, 2003, 5,462 people have been infected with the disease, while 353 people have died. WHO issued a warning on April 2nd urging travelers to refrain from going to Hong Kong, the Guangdong Province, Beijing and the Shanxi Province. While it is needless to say that the virus has adverse effects on human life and health, it is already dampening the Chinese economy by slowing the flow of people. In addition, if there is no solution in the near future, the flow of goods (production and trade) in the mid-term and the flow of money (investment) in the long term will also be affected.
First, the spread of SARS is affecting the flow of people to and from, and also within China. In Japan, travel agencies are suspending package tours to China. Some firms have begun ordering families of employees to return to Japan and are banning business trips to afflicted areas. In Hong Kong, Cathay Pacific Airways has suspended 45 percent of its scheduled flights, while airlines around the world have reduced the number of flights to and from Hong Kong. Although the Guangzhou Trade Fair was held as scheduled from April 15th, the number of contracts that were signed plummeted as foreign buyers cancelled their trips to China. In addition to a large fall in the number of tourists and business travelers from overseas, there is also a sharp decline in domestic tourism and travel.
The next effects of the epidemic will be seen in the flow of goods. If factories are shut down because workers have become infected with the disease, the supply of parts and manufactured goods may be cut off. Furthermore, as a major production base China has become a part of the supply chain for many multinational corporations, and a halt in flow from China would send ripples worldwide. In an effort to avoid such risks, multinational corporations will have no choice but to shift a part of production back to their home country or place orders with other production bases, such as those which are members of the Association of Southeast Asian Nations.
If SARS should spread further, China's crisis management capabilities will be called into question, and in the end could hinder the influx of direct investment. For sure, SARS itself is a new virus and its source and treatment remain elusive; the fact that it has broken out can only be called a natural disaster. However, its spread may in a sense be called a man-made disaster since it was due in part to the insufficient measures taken by Chinese authorities. In fact, there have been no cases of SARS reported in Macao, thanks to stringent countermeasures. While efforts by Vietnamese authorities to quarantine those displaying symptoms, disinfect sites and take other measures to halt the spread of the disease, have enabled it to declare that it has brought SARS under control. By comparison, China's handling of the matter since its first case was reported in the fall of 2002 must be said to have always been a step behind. Foreign media are already criticizing the Chinese government for its intentional hiding of information, which led to the spread of the disease. For these reasons, some multinational corporations may reduce future investment in China. Since the inflow of direct investment has supported the Chinese economy not only on the demand side but also on the supply side, this would have serious implications for the country's long-term economic growth.
Although the spread of SARS has brought about a crisis situation in China, it may turn out to be a blessing in disguise if the Chinese government turns it into an opportunity to speed up reforms. Those responsible for the poor handling of the SARS epidemic have already been punished, with both the health minister and the Beijing mayor being fired. Furthermore, the government has strengthened its cooperative relationship with WHO, and there have been major improvements in information disclosure regarding SARS. These actions are the result of the stronger ties China has formed with the rest of the world following its entry into the World Trade Organization. In the end, it harbors the possibility that political reforms in China will be accelerated. The way in which the new administration tackles SARS will no doubt provide a good indication of its commitment to such reforms.
April 30, 2003
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