Miyakodayori 68

SARS part one: Will it infect China with a fever for reform?

May 9, 2003

Severe Acute Respiratory Syndrome (SARS), a type of pneumonia caused by a new coronavirus unlike any other known human or animal virus in the same family, is currently spreading worldwide, particularly in mainland China and Hong Kong. The World Health Organization issued a warning on May 8 urging travelers to refrain from going to Hong Kong, Guangdong Province, Shanxi Province, Inner Mongolia, Beijing, Tianjin, and Taipei. While it clear that the virus has adverse effects on the public's health, it is also dampening the Chinese economy by slowing the flow of people. In addition, if no remedy is found in the near future, the flow of goods (production and trade) in the mid-term and the flow of money (investment) will also be affected in the long term.

First of all, the spread of SARS is affecting the flow of people to and from and within China. In Japan, travel agencies are suspending package tours to China. 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 flights to and from Hong Kong. While the Guangzhou Trade Fair was held on April 15 as scheduled, contracts 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 has also been a sharp decline in domestic tourism and travel.

The second effect of the epidemic will be witnessed in the flow of goods. If factories shut down because workers are getting infected with the disease, the supply of parts and manufactured goods may be cut off. Because China has become a part of the global supply chain of many multinational corporations as a major production base, this would send ripples into the world economy. 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 in the members of the Association of Southeast Asian Nations or ASEAN.

If SARS should spread further, China's crisis management capabilities will be called into question, and in the end it could become a drag on the inflow of direct investment. To be sure, SARS itself is a new virus and its source and treatment are as yet elusive, and the fact that it has broken out can only be called a natural disaster. Nevertheless, its spread should be recognized as a man-made disaster, since it was in part due to the insufficient measures taken by Chinese authorities.

In fact, there have been no SARS cases reported in Macao, thanks to stringent countermeasures, and efforts by Vietnamese authorities to quarantine the ill, 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. In comparison, China's handling of the matter since its first case was reported in the fall of 2002 has always been one step behind. Foreign media are already criticizing the Chinese government for its intentional secrecy and lack of disclosure, which exacerbated the spread of the disease. For these reasons, 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 accelerate reforms. Those responsible for the poor handling of the SARS epidemic have already been punished; both the health minister and the Beijing mayor were sacked. Furthermore, the government has strengthened its cooperative relationship with the WHO, and there have been major improvements in information disclosure regarding SARS. These are the fruits of the stronger ties China has formed with the rest of the world thanks to factors such as the country's entry into the World Trade Organization. In the end, there is a real possibility that political reforms in China will be put into a higher gear. The way the new administration tackles SARS will no doubt provide a good indication of its commitment to reform.

Author, C.H. Kwan
Senior Fellow
Research Institute of Economy, Trade and Industry (RIETI)

Editor-in-Chief, Ichiro Araki
Director of Research
Research Institute of Economy, Trade and Industry (RIETI)
e-mail: araki-ichiro@rieti.go.jp
tel: 03-3501-8248 fax: 03-3501-8416

RIETI invites you to visit its English website
[http://www.rieti.go.jp/en/index.html].

The opinions expressed or implied in this paper are solely those of the author, and do not necessarily represent the views of the Ministry of Economy, Trade and Industry (METI), or of the Research Institute of Economy, Trade and Industry (RIETI).

May 9, 2003