The Novel Coronavirus and What it Means for China Today

By Doug Guthrie, Dashiell Chien, Chris Gao, and Diane Long

A version of this article was originally published on February 7, 2020, on the site, https://ongloballeadership.com, https://ongloballeadership.com/f/the-novel-coronavirus-and-what-it-means-for-china-today.

In this post (as with all of our posts), we seek to bring together a political economy analytical approach to a given issue with a boots-on-the-ground perspective of how an issue is actually playing out in China. In this case, our focus is the 2019-20 novel coronavirus, the epidemic that is seriously disrupting China today.

Key Insights

1. We are not public health experts but understanding the impact and reach of a phenomenon like the coronavirus requires more than a public health approach to the problem. It also requires an analysis of the political and economic context in which this crisis has unfolded; it requires a people-on-the-street understanding of what is actually happening in China today; and it demands careful consideration of China’s evolving role in the global economy.

2. The economic impact of the coronavirus on China in the short term is unclear, as we do not yet know the extent or spread of the virus. However, the long-term economic impact will likely be small.

3. The political impact for the Chinese Government could be more significant. The Xi administration has aggressively centralized power and controlled the flow of information, more so than any leadership team in the last 40 years. People have largely accepted this as long economic and societal well-being continued to flow. However, if people begin to perceive that the administration’s control over the flow of information puts them at risk in some way (economically or health) things could swing another way. The government is approaching this issue as both a public health crisis and as a political branding issue.

A Very Unfortunate Crisis

Late last week, as the seriousness of novel coronavirus was becoming clear, United States Secretary of Commerce Wilbur Ross noted, “I don't want to talk about a victory lap over a very unfortunate, very malignant disease… [But] the fact is, it does give business yet another thing to consider when they go through their review of their supply chain… So, I think it will help to accelerate the return of jobs to North America.” 

Leaving aside the complete insensitivity and callousness of this idiotic statement (sorry, Wilbur, you don’t get a pass for not “taking a victory lap”), more than that, it’s just silly. It is shocking that the secretary of commerce in the world’s largest economy would have such a facile understanding of something as important for commerce as global supply chains. Does he even understand how global supply chains work? As respected economist Simon Baptist from the Economic Intelligence Unit in Singapore put it, the comment was just “weird.” Baptist went on to elaborate, “Companies are not going to make serious and long-term investment decisions on the basis of an outbreak of a disease that might last three to six months.” Again, Wilbur: “weird.” 

Without a doubt, the spread of the novel coronavirus (新冠肺炎) has moved startlingly fast – about 32,000 cases worldwide as of today, compared to about 8,000 total cases for SARS over a much longer period. The mortality rate is significantly lower than compared to SARS (about 2 percent for the novel coronavirus versus about 10 percent for SARS). Within a month of first being alerted to the virus by the Chinese Government, the World Health Organization (WHO) declared the outbreak a global emergency. There is no doubt this is a serious situation. Let’s consider the issue along a few key dimensions: economic, political, and social.

Economic Impact 

As some pundits and politicians are making the case for the downfall of China’s economy, let’s look at this from the perspective of history and China’s economic fundamentals. First, a little history. The impact of SARS in 2003 is well-documented. The Chinese economy took a hit of about 2 percentage points on year-on-year GDP growth for Q1 2003 (a drop from about 11 percent to about 9 percent). The economy recovered in the second half of the year, but the net result was about a 1 percentage point dip in China’s overall GDP growth for the year against projected growth. These numbers always must be viewed in the context of the overall size of the economy. In 2003, China’s economy was about $1.7TN (about 4 percent of the global GDP), while China’s economy today is about $14.4TN (about 17 percent of the global GDP). Some economists have argued that this difference in size means that the impact of a slowdown will be much larger today than it was 17 years ago. 

That is possible, but we have to take into account other economic factors as well. Most economists we trust predict that China might anticipate a .4 to .6 percentage point drop in GDP growth as a result of the coronavirus. Based on these forecasts, the worst-case scenario is that China’s growth might sink to 5.2 percent. Let’s be clear: we are talking about a once-in-a-decade crisis for the world’s second largest economy, and we are talking about 5.2 percent growth. These are growth rates that Donald Trump can only dream about. (Recall that Trump predicted 4-5 percent growth under his stewardship, but he has never cracked 3 percent.) So, a little perspective here when we are talking about a “radical” decline or slowdown in China’s growth.

China is transitioning from export-led growth to investment-led growth to consumption-led growth. China sits somewhere in between investment- and consumption-led growth today. Trust us, the Xi Jinping administration doesn’t worry too much about a 1 percentage point drop in GDP growth. Countries that have accelerated growth through investment in infrastructure can pretty easily put their thumbs on the scale of GDP growth by continuing to invest in infrastructure, creating more jobs, building more “stuff”, etc. The debt the government needs to take on to do this cannot be ignored (thus the debt-to-GDP ratio comes into play), but the Chinese Government can always find the resources to stimulate growth if it so desires. If you are going to inject a $1TN stimulus into the economy, you are much better off injecting it into building infrastructure than in giving tax breaks to corporate executives for share buyback programs, which do nothing for line workers or corporate R&D investments.

Finally, a few words about the structure of the Chinese economy today. A number of economists have predicted more dire consequences of the coronavirus than SARS because China’s consumption-based economy has risen from 44 percent to 57 percent. The argument goes that if people don’t venture out to buy things, a larger portion of the economy will take a hit today as compared to 17 years ago. What is never mentioned is how much more mobile the Chinese economy is today compared to 2003. People may be staying inside during this crisis – indeed the streets in major cities like Shanghai are empty – but that doesn’t mean they aren’t buying things. Just stand at the entrance of any residential compound in Shanghai to watch the courier delivery mopeds lined up to drop off a myriad of boxes and bags in all shapes and sizes. People may not be venturing out to stores, but RMB is definitely still flowing. China’s mobile/online economy is the most powerful and dynamic mobile economy in the world, and it is a little unclear and too early to tell how a crisis like this affects that economy. 

A couple of nights ago, two members of our team went out to dinner in Shanghai and found the restaurant empty. When they asked the owner if his business was suffering, he responded, “Well, a little bit, but we have just become a takeout establishment overnight. We’ll get back to regular business when people start coming out again. But right now, we are responding to demand with delivery and the mobile economy to fill the gap.” So, the invisible mobile economy comes to the rescue, at least for now, and makes the economic impact even more unpredictable. 

A key point on the economic impact: The Ross statement lays bare a complete lack of understanding of how manufacturing supply chains work in China and Asia more generally. The most profitable manufacturers in the world – whether in automobiles or electronics – deal with so many suppliers in any given supply chain that the idea of “moving manufacturing back to the US” requires much more thinking than politicians like Ross and US trade czar Peter Navarro seem to understand. These supply chains are supported by the Chinese Government. They invest heavily in R&D and infrastructure. They focus on the support of technical vocational education to support the line workers that build these products. The situation is so much more complicated than a simple virus-as-impetus-for-building-factories-in-America view of the world. We’ll see how things play out, but the script is far from written yet.

Political Impact 

Two weeks ago, at a China panel, an audience member raised the question of whether the Coronavirus could be a threat to the Xi regime. At the time, my answer was: “Not a chance. The Hong Kong situation is a much greater risk for Xi’s administration than the coronavirus, the impact of which will pass within six months at the outside.” My logic was the following: In the era of economic reforms, the Chinese Government made an implicit deal with Chinese citizens – let’s put off political reforms, and we promise that life in China is going to get better and better. This promise was mostly an economic one, and the government has basically delivered on that promise. And no one is going to radically downgrade China’s economy based on a 1-2 Quarter societal disruption. So, my logic was, there could be a major disruption (for example a crackdown in Hong Kong), but the Coronavirus was not going to be it.

Now, I’m not so sure. It is no secret that Xi’s administration has been very aggressive in controlling the flow of information over social media. There are many stories about the deleting of posts and the censoring of information. For the current case, the idea that the initial whistleblower, the heroic Dr. Li, who tragically passed away February 6 as a result of exposure to the virus he identified, was admonished for spreading “rumors” over social media has raised a significant amount of ire across China. It is one thing to sensor information about negative views of the government, for example, but censoring information that supports the social good – and the health of Chinese people – crosses a line in many Chinese citizens’ eyes. 

There is a sense that the Central Government’s top down control system has created a culture that stifles the flow of information. This is a reality that has been generally accepted by the Chinese population. The Chinese population willingly bought into the quid pro quo exchanging political transformation (or lack thereof) for economic development. When the Chinese Government stifles the flow of information, the Chinese populace, for the most part, is willing to abide by the censorship. In China today, the ways in which Chinese citizens discuss this agreement is fairly explicit: citizens of China openly acknowledge that the Party guarantees political stability (稳定), safeguards (保障), and economic development (经济发展); in return, society must avoid chaos (中国不能乱). So, when the Chinese Government censors the flow of information, for the most part, the Chinese populace is willing to abide by this quid (censorship and control) as long as they get their quo (economic development).

Yet, this exchange only works if it doesn’t wander into the realm of public safety and social well-being. If the government’s control over the flow of information has implications for what people know about the safety of their health, things might get messy. And there have been plenty of public complaints about the government’s lack of transparency in this particular crisis.

In addition, it remains unclear what the Central Government actually thinks of this crisis – is it a public health crisis or a public image crisis? On January 26, the Central Government formed the Central Leading Group for Coping with the Novel Coronavirus Pneumonia (中央应对新冠肺炎疫情工作领导小组). This emergency task force, led by Li Keqiang, is comprised of high-level party and state personnel, including politburo and minsters in charge of policy, propaganda, foreign affairs, and public security. Oddly enough, there were no public health officials. The closest we get to a health presence on the committee is Mme. Sun, who is Vice Premier in charge of cultural, education, and health areas. However, she is not a public health official in the strictest sense. Interestingly, the line-up looks more like a production team for a major event than it does a public health emergency or disaster-recovery group. 

Societal Impact

Chinese society has been through this before. The most immediate antecedent is SARS, and the parallels between SARS and the novel coronavirus are obvious. But if we extend beyond the virus to the ways Chinese society turns inward to their own internal social networks, we find an interesting pattern. There are many historical precedents of this turn – the Cultural Revolution, the aftermath of the Great Leap Forward, the mass campaigns of the 1950s. Chinese society – no whether its Central Government is responding in the right or wrong way – has a tendency to turn inward, focus on its own network ties, and defend the boundaries of its own social network. 

Because China's local dialects are so distinctive, people can often be identified as being from a given place. In crises such as this one, discrimination can quickly rear its head. If you are from Hubei, you are a target in China right now. An extended family member of one of our team reported the following[LM1] : In her residential compound, the compound management knew that one family came from Hubei province. After the Chinese New Year, as people were returning from their annual treks to their hometowns, the management team, along with the Public Security Bureau (PSB) were waiting for this family. They were not allowed to enter their home and were taken directly to one of the “isolation motels” for 14 days of observation. They weren’t confirmed ill nor had they showed any symptoms ; they were simply from Hubei. There is also the reported case of the Shanghai residents who refused to board an international flight from Nagoya to Shanghai because individuals from Hubei were also boarding the flight. These moments make it clear how Chinese internal social networks can circle the wagons very quickly in times of crisis. 

This type of prejudice also extends beyond provincial and hometown location. For example, the City of Wenzhou is known to be a very entrepreneurial city in the center of Zhejiang province. Wenzhou entrepreneurs made a lot of money in the early years of the reforms, and they began to invest together around the country and throughout the world. They invested in coal in Shanxi; real estate in Shanghai; restaurants in France and Italy; and, most recently, they became major investors in real estate and wholesale operations in Wuhan. In the current crisis, the suspicion surrounding anyone from Wenzhou, whether or not they are part of the Wuhan real estate investment club, is real. 

This discrimination isn’t the sole province of the Chinese against other Chinese people. There is also the international side of the equation, and this situation seems to tiptoe up to the line of outright racism. Discussions of Chinese “wild animal markets” or the “rampant spread of viruses in China” [both phrases can be found on the Internet with simple Google searches] should strike fear in anyone who is sensitive to notions of Chinese essentialism or, dare we say, racism. Major newspapers like the French paper Courier Picard have shockingly invoked old racist memes on their front pages. Now, there is certainly a clash of cultures and economic development here. China is a place that enjoys and protects exotic markets in goods and animals. It is also a place that sends and exports more people and capital to the world than any other country in the world. It is a country that sends more foreign students than any other country in the world; it is a country that sends more tourists around the world than any other country in the world. And it is soon to be the largest economy in the world. So, we come to a clash of cultures, a clash of worlds. 

An Unfortunate Common Ground

What will be the impact of the novel coronavirus in China be in 2020? Our view is that the economic impact is likely overblown. There are real issues here, but China is in the economic development game for the long haul. It is orchestrating the economic development process as adeptly as is possible for a country of its size. That doesn’t mean there won’t be disruptive effects to the virus, both politically and socially. This could have implications for the Central Government’s authority, but we also believe these will likely blow over. The extent of the current societal rebellion over the government’s handling of this crisis remains noteworthy, and we will continue to watch with interest. Ironically, and unfortunately, the virus has created common ground between Chinese society and the world: For both, the answer to a public health crisis for is fear, exclusion, and discrimination. In this sense, both China and the world have a lot of work to do.