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SARS Virus Infects China's Economy
The severe acute respiratory syndrome (SARS) epidemic has evolved into a crisis, the end of which is hard to predict.

The pervasiveness of the present crisis comes in two ways. One is geographical - SARS has spread from Guangdong Province to Beijing and other parts of the country, and indeed the world. The second is dimensional and concerns the impact on social activities, economic development and international relations.

The negative impact of SARS on the Chinese and Asian economies is all too evident. Many institutions are of the opinion that SARS will do more damage to economic growth in Asia than the war in Iraq. Take a look at the retail business in Hong Kong, which fell by 50 per cent in March, while many restaurants have either closed or taken an extended holiday.

Singaporean Deputy Prime Minister Lee Hsien Loong remarked in early April that SARS has significantly disrupted his country's economy. It remains uncertain as to how long or how serious the impact of SARS will be. But one thing is certain, economic growth in the first half will be affected, and Singapore will have to readjust its growth forecasts for the entire year.

This pattern could be repeated in other Asian nations. And China is no exception.

SARS has already badly hit the Chinese economy, although specific analysis is not yet available.

As is apparent, the tourist industry and related sectors are suffering. According to a survey of 20 four and five star hotels in Beijing by the China Economic Monitoring Centre under the National Bureau of Statistics, their occupancy has fallen by 30 percent since April compared to the same period last year. The occupancy of six five star hotels surveyed has decreased by 50 percent. Hence it is not difficult to imagine the losses to airlines, restaurants and tourist sites.

Telephone interviews with 48 transnational corporations conducted by the center revealed that they have banned their employees from traveling in China and their businesses in the country have been affected to varying degrees. A survey of 50 enterprises in Beijing shows that 36 of them have cancelled or reduced domestic business travel. Another interview with 160 Beijing residents shows that 72 percent of them have cancelled journeys and cut back on shopping trips and socializing through fear of catching the disease.

Though this data contains no statistical value, it is a good indicator of the huge, negative toll SARS is having on the economy.

And the impact on China's economy brought about by SARS could be greater than that of the Asian Financial Crisis of 1997.

Here are the reasons.

Tourism is the first sector affected, followed by trade and investment. The exchange of people, goods and capital between China and the outside world will be reduced. Personnel exchange is the basis of international trade and investment. Stagnancy of personnel exchanges, due to SARS, will certainly decrease the growth of exports and foreign direct investment in China this year which was 9.2 percent over the same period last year.

Furthermore SARS has dramatically altered the lifestyle of the general public, causing considerable harm to service sector consumption, in particular the areas of travel and entertainment. Thus the increase in consumption in 2003 will not be as robust as that of the first quarter of this year.

Also, the production capacity and growth of fixed assets investment will be adversely affected in 2003. Employees' rate of attendance is dropping due to SARS. The confidence of manufacturers and investors is also affected.

SARS will reduce the profits of some enterprises. And if the situation is not quickly reversed, businesses will be faced with the stark choice of cutting salaries, staff or even going bankrupt. This in turn will cut income levels.

And as the service sector, a major channel for absorbing the labor force in urban areas, is most affected by SARS, the employment situation there may turn.

Even if the epidemic is soon curbed, the adverse impact on the economy will not immediately be put right.

All of these factors need to make us rethink the impact of the Asian Financial Crisis of 1997. The Chinese economy was not too affected that year and indeed realized a growth of 8.8 percent. But the following year, 1998, the situation was difficult. China's economy faced serious problems including insufficient domestic demand, decreased exports, and difficulties in enterprise production. To address the crisis the Chinese Government carried out a series of proactive macro-economic policies to stimulate economic growth, but in spite of these moves, the country failed to realize the goal of 8 percent growth.

In many respects, the SARS crisis is similar to the financial crisis of 1997.

Before both, there were optimistic predictions concerning economic growth. The negative impact was at first underestimated and countermeasures were initially inadequate. When both crises worsened, there were transitions in the Chinese leadership and a reshuffle in government.

The prevailing economic situation in Asia in 1997, as now, was also gloomy. It became hard to gear up domestic demand due to decreased consumer and investor confidence.

Drawing on the lessons of 1997, the Government must act swiftly and vigorously to turn the situation as market power is weak.

But there are significant differences between the two crises.

SARS is having a broader impact on the Chinese economy. The impact of the Asian Financial Crisis on China was that currency depreciation in neighboring countries reduced China's export competitiveness and import demand for Chinese products as the economies of their neighbors shrank. The SARS crisis, however, is also affecting domestic demand.

Proactive fiscal policies and expanded domestic demand helped China weather the Asian Financial Crisis. But today there exists an uncertainty about the increase in domestic demand.

The impact of the SARS crisis will be more enduring than a mere economic crisis. If the epidemic situation can not be controlled effectively, production and supply within the infected provinces and regions will be affected.

The SARS crisis is having a profound impact on China. The country is regarded as a disease epidemic area in the eyes of some countries and organizations. Travel advisory warnings concerning China have been issued, many international meetings and sports events have been cancelled or postponed and some countries have even closed their doors to Chinese travelers.

In conclusion, although China's economic environment has improved enormously in recent years, the government's ability to handle and respond to crises has been enhanced and the country's economic power is sound, we cannot afford to be complacent or underestimate the impact that SARS will have and the toll it will take on the nation.

The author is a researcher with the China Economic Monitoring Centre under the National Bureau of Statistics.

(China Daily May 6, 2003)

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