1 June 2003
Economic Impact
Impact of SARS on Chinese Economy
The impact of the extensive outbreak of SARS, which began to plague China in February and March 2003, is multi-faceted and is affecting the country politically, economically and socially to various extents.
Scope and Duration of Impact
Two uncertainties, namely the scope and the duration of the epidemic, are key factors in determining the extent of the SARS impact on China.
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Scope. Regional disparities in China's economic development have resulted in disparities in medical conditions between different regions and their ability to cope with emergencies. At present, SARS is mainly affecting Guangdong, Beijing, Shanxi and Inner Mongolia. However, with the outward flow of people from these areas, the disease is spreading to other parts of the country. If the virus breaks out on a large scale in the rural areas and the western region, it would be hard to keep the overall situation under control. Hence, it is difficult to gauge the extent of the epidemic at this stage.
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Duration. It is also difficult to tell how long the epidemic will last. Judging from the general law of epidemiology, SARS will continue to plague Beijing for some time, while the peak has yet to arrive in other areas.
Impact on Various Sectors
SARS has dealt a crushing blow to many sectors. Tourism, transportation, entertainment, restaurant, hotel, exhibition and other services sectors are directly affected, with tourism being the worst hit.
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Tourism. The tourist industry bears the brunt. According to official statistics, China grossed Rmb33.1 billion in tourism revenue during the week-long May Day holiday in 2002, up 14.9% from the previous year. The SARS outbreak this year forced the government to cancel the May Day holiday. Various provinces and cities also issued circulars urging people to drop their travel plans and take strict quarantine measures against visitors from SARS-infected areas. This means hardly any May Day tourism revenue this year. If the epidemic is not brought under control in the near future, even the coming National Day and Spring Festival holidays will be affected. International tourism is also badly hit. Travel agencies in China are expected to report a 20% drop in business this year, with losses exceeding Rmb120 billion.
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Airline. Whether or not air services will report profits will depend on how fast the epidemic is brought under control. China's civil aviation industry registered profits of Rmb770 million across the broad in 2002, but the momentum is unlikely to continue this year. Recovery will depend to a large extent on control of the virus. Domestic flights are likely to see a quick rebound if the situation shows an obvious turn for the better in the near future. Otherwise, overall loss for the whole year is on the cards. Business on international routes will remain sluggish for some time and will see a slow recovery.
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Retail. Department stores have received a devastating blow, with stores reporting an 80-90% drop in customer flow. Sales take a plunge as the number of shoppers visiting Wangfujing plummets to less than 10,000 from 200,000-400,000 on a normal day. Large department stores see daily sales turnover slipping by more than 50%. To the contrary, supermarkets and hypermarkets selling daily necessities are doubling their business. However, this short-term boom will not last. Urban residents are stocking up on disinfectants, hygiene products and daily necessities out of panic. Once the epidemic is effectively brought under control, sales of these commodities will turn sluggish. Otherwise, there will be another round of panic buying. However, without proper logistics support, there could be a scarcity of certain commodities in the market, thus further exacerbating the situation. This will affect stability and make it more difficult to contain the epidemic.
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Catering and entertainment. The impact on the restaurant and entertainment sectors will be long term. The spread of SARS has already affected people's spending habits in many ways. In fact, the impact of SARS on spending is expected to remain even after the epidemic is brought under control as people are likely to shun consumption and entertainment in a big congregation for a long time to come. This will prolong the SARS impact on the restaurant and entertainment sectors.
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Insurance. The insurance sector will sustain "policy losses". While insurance companies and supervisory departments have different views about SARS-related claims, the China Insurance Regulatory Commission (CIRC) has issued an urgent circular calling upon insurers to give priority to the proper handling of SARS-related claims. Insurance companies that arbitrarily delete SARS-related claims from stipulated provisions will be severely dealt with by CIRC. In a sense, this has become a "political issue" because the public is particularly sensitive about SARS-related claims. Insurance companies will find themselves duty-bound to settle such claims.
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Investment. The impact on investment is difficult to assess at this stage. However, SARS is already affecting the following areas:
Foreign investment -- the fact that foreigners are afraid to come to China is affecting the performance of old contracts and the inflow of new capital. However, the long-term attraction of foreign investment will not suffer a major setback if the epidemic is brought under control in three to six months.
Government investment -- the adverse effect of SARS on economic activities will make a big dent on government revenue. This, coupled with extra-budgetary expenditures on SARS prevention and control, will ultimately increase budget deficits and directly affect government investment.
Enterprise investment -- if SARS comes under control in three to six months and market demand is not too seriously affected, the impact on investment by enterprises will be small.
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Hotel and exhibition. Hotels in large cities like Beijing, Shanghai, Guangzhou and Tianjin have received a devastating blow with occupancy rate plunging sharply. Most of the conventions and exhibitions scheduled for May and June have either been cancelled or postponed to the second half of the year. Undoubtedly, the events will be further postponed if the epidemic is not quickly brought under control.
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Transportation. All major cities have issued circulars warning their residents not to venture out and restricting the entry of people from SARS-infected areas. This has resulted in a sharp drop in cross-regional flow of people and dealt a crushing blow to the transportation sector. The drastic decline in the movement of people within cities also adversely affects the income of urban transport operators. Many inter-city passenger trains have suspended services for lack of travellers, while urban public transport has lost between 80% and 90% of passengers. Cargo transport is also affected. Beijing and other cities badly hit by SARS are beginning to feel the pinch. The consequences will be catastrophic if the epidemic continues to exacerbate.
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Manufacturing. As the impact on the manufacturing sector gradually surfaces, exports will be hard hit. Processing trade accounts for more than 50% of China's foreign trade. Apart from the fact that many foreign businessmen are making purchases elsewhere because they are afraid to come to China and many production lines are plagued by problems of communication with buyers and shipment of goods, some countries are also imposing restrictive measures on goods manufactured in China. Such trade barriers will magnify as the epidemic continues. High-tech enterprises, which most people think would not be affected by SARS, have also suffered a heavy blow. For example, a certain high-tech production enterprise in Beijing reported a turnover of more than Rmb50 million in 2002, but only grossed Rmb6 million by 22 May this year, with business mainly from orders in the first quarter. The company has not received any new orders since April. According to the company's financial controller, they would consider having won the battle if the epidemic is brought under control around September and they could fulfill the 2002 target.
Pressure on Fiscal System and Economic Growth
SARS has brought a direct pressure to bear on China's fiscal system. Both the central government and local governments have already approved emergency funds for the prevention and control of SARS, and more financial support will be needed to help fight the epidemic in the next few months. As things now stand, fiscal pressure is unlikely to be devastating if the virus could be effectively brought under control in the next three to six months, but the central government will continue to pursue a proactive, even expansionary, fiscal policy to deal with the SARS impact.
If the epidemic lasts more than six months, fiscal pressure will gradually become manifest, thus affecting the central government's GNP growth target. Authoritative institutions reckon that China's GNP growth will slow down by between 0.2% and 0.5%. Judging from the latest impact on the central and local economies, if the epidemic is effectively brought under control before the end of June, only economic growth in the second quarter will be affected. With overall rapid growth in the first quarter to offset the impact, GNP growth will likely only see a 1% fall. If the virus continues until September, GNP growth will be affected by no less than 2%. There will be serious consequences if the situation cannot be brought under control or deteriorates before the end of the year. Not only will economic progress be affected, even social development will be challenged. Government prestige, stability, social morale, consumption concepts, disparities and antagonism between urban and rural areas, the urbanisation process and other non-economic factors will all be affected.
Impact on Hong Kong
As China's biggest source of foreign investment, Hong Kong has always been an important force in the mainland's economic development. SARS has not only dealt a serious blow to the Hong Kong economy but has also affected the entry of Hong Kong enterprises to the mainland market.
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Hong Kong manufacturers mainly invest in processing trade enterprises in Guangdong and the coastal areas. Restrictions imposed on China's exports will directly affect the income of these Hong Kong enterprises.
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Travel restrictions imposed by some provinces and cities against people from SARS-infected areas have erected obstacles to the entry of Hong Kong people working in China. Hong Kong-funded services in the mainland also feel the pinch.
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Many Hong Kong enterprises will stay away from the mainland, especially the major SARS-infected areas (which are also centres of investment) in the near term. This will definitely affect new investments in China.
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Hong Kong is heavily dependent on the mainland in its economic development. If China takes a long time to contain SARS, thus affecting the national economy, it is bound to have an adverse effect on Hong Kong's economy. Hong Kong enterprises should fully bear this in mind and plan ahead.
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However, since China's economy as a whole will be affected and all sectors will suffer to varying extents, different provinces will become increasingly reliant on foreign investment. This will bring more opportunities to Hong Kong enterprises.
Conclusions
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The negative impact of SARS on China's economy is full-fledged. With the exception of a few sectors that benefit from the outbreak, most sectors, including services and manufacturing, are badly hit. It is no longer possible to achieve the projected 7-8% GNP growth target. Seen from affected areas, the impact on the seriously infected areas will be much greater than on the country as a whole. For example, Beijing's economic growth will suffer a heavy blow and the projected 10% GNP growth will be unattainable.
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The fiscal system and macroeconomic targets of the Chinese government will both be affected. The central government will likely pursue a proactive fiscal policy in the days ahead.
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The Chinese government has repeatedly stressed the need to grasp economic development and SARS prevention and control at the same time. However, an analysis of the present situation shows that the government's first priority is to keep the epidemic under control as soon as possible and economic growth has been relegated to a secondary position.
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Impact on the economy will be proportional to the time SARS is effectively brought under control and the extent of its spread. If the epidemic can be contained before June, the impact will likely be around 1% only. If it is brought under control before September, the impact will definitely exceed 1% and could well reach 2%. If it comes under control before the end of the year, the economy will suffer a greater blow and GNP growth will drop by 3-4%. But if the epidemic continues unabated for a year, it would be difficult to assess the consequences. There are reports that the disease is beginning to spread in some places. As such, the possibility of bringing the situation completely under control before June is rather remote. It will probably be some time around September that SARS can be effectively contained.
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Compared with a normal year, Hong Kong enterprises will find greater opportunities in the mainland. To begin with, Hong Kong funds will continue to be coveted by governments at all levels as in the past. Second, Hong Kong's role as an intermediary will become more important today as China suffers setbacks in exports. Third, Hong Kong's service sectors (such as urban infrastructure) as well as urban management and crisis management companies will be valued by the Chinese government and can find more opportunities of entering the mainland market.
SARS Hits Taiwan's Tourism
On account of the spread of SARS worldwide, Taiwan people are afraid to travel abroad and overseas tourists are afraid to visit Taiwan. According to statistics published by Taiwan's Tourism Bureau on 14 May, international tourist arrivals in April slipped by half, to 110,000 people, compared with the same period last year. The impact was even more serious for out-bound travels, with the number of travellers dropping by 64%, to 420,000 people, compared with the corresponding period in 2002.
According to the Tourism Bureau, 230,000-250,000 foreigners visited Taiwan for business or pleasure each month between January and March 2003, more than the corresponding 2002 figure. The number of tourist arrivals was expected to double. With the sudden outbreak of SARS, however, tourist arrivals in April plunged to 110,632, a drop of 53.56% over the April 2002 figure.
Visitors shunning Taiwan are mainly those from Japan, Hong Kong, Macau, the US, South Korea, Singapore and Malaysia. An average 70,000 Japanese visited Taiwan in tour groups each month in the past. The fact that they are now dragging their feet has dealt a most telling blow to Taiwan. According to the Tourism Bureau, Taiwan was still expecting 20% of the usual group turnouts in early May, but when the WHO extended the travel advisory to Taiwan on 8 May, even that 20% vanished in smoke.
The picture for outbound travels is even more pathetic. About 500,000 and 600,000 Taiwanese travelled abroad each month between 2002 and February 2003. They were mostly bound for Hong Kong, Macau, the Chinese mainland and Japan. The number dropped to 469,590 in March and 232,358 in April, 64.53% less than in the corresponding period last year.
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