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Jan. 28, 2020, 8:59 a.m. EST

Three reasons coronavirus won’t derail China’s economy

Investors are overreacting to the Wuhan epidemic

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By Shang-Jin Wei

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The government has just announced an extension of the holiday period, but many companies will find ways to make up the lost time later in the year. The short-term negative impact is thus likely to be concentrated among restaurants, hotels, and airlines.

Second, all reports indicate that the Wuhan coronavirus is less deadly than SARS (although it may have a faster rate of transmission initially). Equally important, the Chinese authorities have been much swifter than they were during the SARS episode in moving from controlling information to controlling the spread of the virus.

By implementing aggressive measures to isolate actual and potential patients from the rest of the population, the authorities have improved their chances of containing the epidemic much sooner. That, in turn, increases the likelihood that the lost economic output this quarter will be offset by increased activity in the remainder of the year.

Third, whether or not China’s trade negotiators realized the severity of the Wuhan virus when they signed the “phase one” trade deal with the United States on Jan. 15, the timing of the agreement has turned out to be fortunate.

By greatly increasing its imports of facemasks and medical supplies from the U.S. (and elsewhere), China can simultaneously tackle the health crisis and fulfill its promise under the deal to import more goods.

Global growth

The virus’s impact on other economies will be even more limited.

During the last half-decade, many major central banks have developed models to gauge the impact of a slowdown in China on their economies. These models were not built with the current health crisis in mind, but they do take into account trade and financial linkages between China and their respective economies.

As a rule of thumb, the negative impact of a decrease in China’s GDP growth on the U.S. and European economies is about one-fifth as large in percentage terms.

For example, if the current coronavirus epidemic lowers China’s growth rate by 0.1 percentage point, then growth in the U.S. and Europe is likely to slow by about 0.02 percentage point. The impact on Australia’s economy may be twice as large, given its stronger commodity-trade and tourism links with China, but a 0.04-percentage-point reduction in growth is still small.

Such calculations assume that the coronavirus does not spread widely to these countries and cause direct havoc. This currently seems unlikely, given the low number of cases outside China.

Of course, the impact on China and other economies could be more severe if the coronavirus crisis were to last much longer than this baseline scenario assumes.

In that case, it is important to remember that Chinese policy makers still have room for both monetary and fiscal expansion: the banking-sector reserve ratio is relatively high, and the share of public-sector debt to GDP is still manageable compared to China’s international peers. By using this policy space when necessary, China’s authorities could limit the ultimate impact of the current health crisis.

The coronavirus outbreak is understandably causing alarm in China and elsewhere. But from an economic perspective, it is too early to panic.

This article was published with permission of Project Syndicate Will the Coronavirus Cause a Major Growth Slowdown in China?

Shang-Jin Wei, a former chief economist at the Asian Development Bank, is professor of finance and economics at Columbia Business School and Columbia University’s School of International and Public Affairs.

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