Date: 17 February 2020 Author: Paweł Paszak

The coronavirus hits the PRC’s economy

The outbreak of the coronavirus epidemic at the turn of December and January 2019/2020 contributed to a serious deterioration of expected economic growth in China from 5.8 to even 4.8%. It is estimated that the crisis may cost the Middle Kingdom at least 100 billion dollars whereas global losses will be even higher. Oxford Economics institute has already lowered the global economic forecasts from 2.5 to 2.3% which would be the worst result since 2009.

Source: GangstonTech / Wikimedia Commons

The virus, which has infected over 70 thousand and killed over 1.8 thousand people since January 2020, caused not only a human tragedy but also a great challenge for the PRC’s economy. The central role of industrial companies localised in China means serious problems with supply chains for international companies. Only in Wuhan, a city with 8 million citizens, which is the centre of the outbreak, production halls of General Motors, Honda, Nissan, Peugeot and Renault are localised. In turn, Hubei province is responsible for 9% of the domestic car production which causes huge problems for the car industry. A great majority of factories, not only within the direct impact area of the virus, remains closed or uses only a small part of its production capacities (16.02 status). Among them, there are factories belonging to Foxconn, the main subcontractor of Apple. The production downtime in the main factories will translate to the decrease in production and will extend the waiting time for goods produced in PRC. Due to the lack of elements, the South Korean Hyundai had to cease works in the biggest car factory in Ulsan. Euromonitor centre points that in 2018, China was responsible for the export of 33% of household goods, 27% of high-tech devices and 23% of clothes and textiles. Mentioned sectors are the most subject to additional costs and delays. The final scale of losses will depend on the effectiveness of authorities in Beijing and virus prevention. Every next month of quarantine will generate billion dollars of losses.

The world tourism industry, next to the industrial sector, will incur the greatest losses caused by the spreading virus. In 2018, the Chinese constituted 10% of all tourists in the world and spent over 277 billion dollars in total. Communication blockades will limit connections not only with China, but also with other Asian states. According to The Economist Intelligence Unit, world tourism industry may lose up to 80 billion dollars and Southeast Asian states will suffer the most. European countries are less endangered. For these countries, Chinese tourists constitute about 4% of all tourists and in the case of Poland, the rate is even lower – 0.68%.

The extending crisis is not neutral with regard to the Chinese stock exchange and financial sector. When on February 3, the Shanghai Stock Exchange (SSE) was opened with a delay, Chinese companies lost 720 billion dollars of their value and authorities in Beijing were forced to introduce aid packages worth 1.2 trillion yuan (171 billion dollars). As a result, listed companies partly recouped the losses and calmed the situation down. Similar actions were taken in response to the world financial crisis in 2007-2011 which helped to maintain the relatively high economic growth and rescue thousands of workplaces. Current practices of the central authorities imply that they will again resort to similar measures to stabilise the economy and financial system.

The influence of the crisis on Central and Eastern Europe is also worth noticing as it goes beyond suspended flights to and from China by the Czech Republic and Poland. It may turn out that the influence of the current situation on Germany, which is the main economic partner of Warsaw, is even more important for Poland. For BMW, Mercedes or Volkswagen China remains the most profitable market which means that a drastic deterioration of the economic situation will reflect in the German export. According to the China Association of Automobile Manufacturers’ data, in January, the sale of cars decreased by 30% which coincided with gradual falls from 2019. Deterioration of the already poor situation of the German economy (0% of growth in the last quarter of 2019) will influence the trade with Poland, the Czech Republic, Hungary and other states in the region.

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