From left to right: Yongmiao Hong, Will Cong, and Kaushik Basu

Courtesy of Cornell University

From left to right: Yongmiao Hong, Will Cong, and Kaushik Basu

March 1, 2020

As Markets Tumble Amidst Coronavirus Outbreak, Professors Weigh In On Future of Chinese Economy

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Correction appended.

In the past two months, the novel coronavirus, now often called COVID-19, has infected over 70,000 people in China, continuing to spread rapidly as it makes inroads in the U.S. — which, on Sunday, reported its second fatality from the disease.

While it has not yet been declared a pandemic, the effects of the virus have been seen worldwide in slowing factory output and a contraction in the services sector, raising concerns about the economic impact of the coronavirus.

Reflecting those intense anxieties, American markets saw historic turmoil last week. Erasing nearly $6 trillion in equity, the S&P 500 saw its worst week since the 2008 financial crisis, while the Dow Jones lost a record 1,190.9 points.

But as the world’s second-largest economy and responsible for nearly 20 percent of global exports, China is especially vulnerable to the outbreak. Due to strict travel restrictions and containment efforts aimed at halting the disease, China’s manufacturing has reached record lows — affecting millions of consumers and businesses that rely on the nation’s production.

“China is sufficiently important in the global economy today that others are bound to feel the strain,” Prof. Kaushik Basu, economics, told The Sun.

But within its borders, China’s increasing reliance on the purchasing power of its middle class to fuel growth has put the nation at particular economic risk.

“Compared to 40 years ago, today’s China has a domestic demand-driven economy much like the U.S.,” explained Prof. Yongmiao Hong, economics. “The coronavirus will not only have an immediate effect on the service sector of the Chinese economy, but also influence other countries that rely on Chinese visitors.”

For instance, millions of Chinese people shop for gifts on the Lunar New Year — which this year fell in late January just as coronavirus began gaining a nationwide foothold — typically generating well over $100 billion in sales. But such consumer activity has been severely contracted following the virus’ onslaught.

As a result, the long-term financials of some businesses may be in jeopardy, as the coronavirus continues to to increase the speed of capital outflow from China — continuing a trend that had already been exasperated by a years-long trade war with the U.S.

“The more serious challenge comes from the supply chain,” Hong said.  For example, car companies like Hyundai and Toyota have temporarily discontinued their production in South Korea and Japan respectively, due to the interrupted supplies from China. “If the coronavirus drives them to transfer their companies to other countries, it will be difficult for China to get them back.”

To proactively protect themselves from these economic risks, many businesses have started to implement damage control. Companies like Apple and Microsoft, for example, have already issued warnings to investors about not meeting projected earnings figures.

Moreover, according to Basu, banking giant HSBC plans to cut 35,000 jobs, while the global airline industry is estimated to lose 30 billion dollars this year.

While the struggles of certain sectors, like the airline industry, come as no surprise amidst a worldwide outbreak, Basu expressed concern that there will be a “possible cascade[ing]” effect of the coronavirus.

For instance, “the airline industry doing badly adversely affects the catering industry, which in turn, can impact farmers.”

Echoing America’s nervous investors, China’s financial markets have also reflected the uncertainties of these concerns. According to Prof. Will Cong, finance, the outbreak has soured a stock market that has already been “lukewarm” since April 2019, causing the Shanghai Composite to drop more than eight percent in one day.

However, Cong suggested that patience may be the best remedy to quell stock market fears.

“I personally expect the stock market to rebound and correct over-reactions to the coronavirus problem. The harder question is when,” Cong said. “If it is just as severe or becomes more severe, then that would be a big issue for both stock markets and the economy.”

And despite the negative consequences of the coronavirus on the Chinese economy, Hong nevertheless pointed towards possible positive effects, positing that new industries such as automation and remote-conferencing may see growth as employees are increasingly asked to work from home.

Case in point, the stock price of online video conference company, Zoom, doubled since the coronavirus outbreak.

But whether or not these trends play out completely — or turn out to be short-term, ephemeral swings — is yet to be seen.

“We have not seen the end of the pandemic and still do not know what course it will take,” Basu said. “Once this is behind us, we have to use this as a lesson to build a stronger future.”

Correction, March 2, 11:30 a.m.: A previous version of this story incorrectly misspelled the name of Prof. Yongmiao Hong. The article has since been updated. 

Correction, March 3, 8:05 p.m.: A previous version of this story incorrectly quoted Hong comparing China to 70 years ago; in fact, it was comparing China to 40 years ago. Secondly, previously the article stated China has a “consumption-driven economy,” this was changed to “domestic-demand driven economy.” Thirdly, the article stated “to reduce the amount of capital flowing into China”; it now is changed to “to increase the speed of capital outflow from China.” Finally, the article stated that Hyundai and Toyota temporarily discontinued their production in China; this was changed to in South Korea and Japan, respectively .