Wed, May 07, 2003 - Page 8 News List

SARS will deal a blow to China's economy

By Wang Dan 王丹

The outbreak of severe acute respiratory syndrome (SARS) has hit Beijing hard and swept across China. The epidemic will have a tremendous impact on China's political and economic situation. Various indications have now emerged as to what kind of impact the outbreak will have on the power structure, but they are not adequate to draw conclusions.

The only sure thing is that the outbreak will deal a fatal blow to the economy. In China, where politics and the economy are closely intertwined, stupendous economic losses might trigger political upheaval.

Although the outside world could only make tentative evaluations on the economic losses that SARS will inflict on China, the figure is already staggering. The April 24 issue of the Far Eastern Economic Review presented a study of government documents and reports issued by eight financial institutions, including Merrill Lynch, Goldman Sachs and Morgan Stanley. The study arrived at an estimated loss of US$22 billion.

This is merely the direct losses resulting from preliminary estimates. With SARS continuing to spread from Beijing and Guangzhou to all over China, the figure will definitely keep going up.

For example, China's manager of the sporting-goods manufacturer Adidas said if the Beijing authorities fail to contain the SARS outbreak by mid-May, Adidas will have to consider transferring some orders to other countries such as Vietnam and Indonesia. Several manufacturers of ready-made clothes also have similar contingency plans.

On the surface, the SARS impact on China's economy is manifest in the shrinking tourism sector, plummeting stock prices and decreasing orders from foreign companies. But the real threat does not lie here. For example, China's tourism industry does not account for a big chunk in the overall economy, and it will not have a great impact on the gross national product even if travel agencies have to close. The real crisis lies in two aspects.

First, a decline in the economic growth rate. Citigroup recently revised its forecast of China's economic growth this year, down from 7.6 percent to 6.5 percent. This is not far off from the World Bank forecast. In any case, a decline in the economic growth rate is unavoidable.

For years China has relied on high economic growth to maintain social and economic stability. Without it, unemployment and the financial black hole cannot be effectively contained. The SARS epidemic will eventually pass the peak, but the social crisis, induced by the slowing economic development, will soon surface and brew a second storm. The exhausted Chinese authorities might find it impossible to salvage the situation.

Second, a decline in foreign investment. China's steady growth in the past decade reflects its increasing dependence on foreign investment. As domestic demand is seriously insufficient, China will not have the oil it needs to start the economic engine once foreign investment slumps.

The SARS storm will expose the contradiction between China's autocratic structure and the market-dominated free economy. Foreign companies' faith in Beijing will be affected. To what extent this will affect investor confidence will be of crucial importance.

Even if the SARS outbreak can be kept under control, it may not be entirely contained in the short term. China will still be viewed with fear, which will deal a fatal blow at its efforts to attract foreign investment.

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