Wang Tao: Coronavirus Should Not Alter Long-term Growth Trends

Following a Caixin Global Webinar on Feb. 27, Dr. Wang Tao, speaker and chief China economist at UBS, answered additional questions from the audience after the webinar as below:

1. What potential permanent changes or impacts are there for to China?

We see the coronavirus as a temporary shock to the economy that should not alter long-term growth trends. Of course, if work disruption lasts longer, we could see more small companies going bankrupt, rising unemployment, and companies reconsidering their supply chain decisions.

2. Now that the virus is spreading to other countries, what is your assessment of the global trend and impact?

I am not an expert on viruses or epidemics. On China's supply chain and export disruptions – the biggest impact so far comes from the virus situation in China and related travel and transport restrictions. As the virus gets under control outside of Hubei province, transport and travel restrictions are relaxed, and work resumes, we think China's supply chain and exports should normalize soon. For the global economy, there is indeed a new risk of supply chain disruption coming from the virus in Korea and Europe.

3. With the recent news from the USA CDC and drop in the market, it seems that the Trump Administration is being forced to become more rigid in their response to the potential spread of the virus. What is the worst case scenario you see if things continue to be restricted? And how has the virus impacted the ability to complete a trade deal?

The most rigid travel restrictions that affected China's economic activities have been within China, and these are being gradually relaxed.

On the trade deal, the phase one trade deal has already been signed, but the virus will likely make it more challenging for China to import so much more from the US in 2020. We shall see how the two sides deal with this issue later in the year. We did not expect any new trade deal (phase 2) in 2020 and still do not expect any.

4. Speakers mentioned that China's long-term growth and structural reform patterns will remain the same. To mitigate the damage of the virus on China's economy, how likely is it that the Chinese central government will speed up its reform agenda, especially in some key sectors, such as opening up automobile manufacturing?

China has been accelerating its reform and market opening, and we expect this trend to continue.

5. Could you please elaborate on the impact of the outbreak on BRI? The trend towards more commercially viable and bankable BRI projects has been a gradual one, but it has been happening over the last two years; how is the outbreak accelerating this trend? Do you think the outbreak will influence the trend of BRI in the long term as more GNP instead of GDP is good for Chinese economic development?

We do not expect the virus outbreak to have a long term impact on the BRI initiative.

6. Surveys show businesses are worried about sluggish demand and fewer clients, so what do you think authorities should do to boost demand other than easing monetary policies?

Right now, the decline in business activity and sales is mainly due to travel and transport restrictions, not a lack of innate demand. As time goes by, with more businesses and employees affected, demand will also be affected as companies will have less money to invest and workers less money to spend. The government should focus on controlling the virus now and facilitate a return to business as usual, provide cash subsidies to affected employees and the low-income population, and increase fiscal spending on healthcare and infrastructure.

7. Do you expect the outbreak to actually have a positive impact on China's economy and reform process?

The outbreak has cost thousands of lives and affected millions of people, and has hit the economy very hard. So net, it is definitely a big negative. The only possible positive is if we all learn from this and reduce the damage of future outbreaks and limit future damage.

8. How will China relieve foreign countries’ fears of allowing Chinese after COVID19 is under control, especially for the tourism and education sectors? In the same way, how can China convince foreigners that it will be safe to come to China?

China needs to get the virus under control. Confidence may come back only slowly.

9. Do you think the impact will become more severe in the 2nd quarter?

No. The biggest impact on the economy should be in Q1, as many activities ground to a halt. We should see some normalization and rebound in Q2.

10. Do you see a V-shape rebound of the China economy after the virus is contained or do you see a more protracted recovery? What would be the key factors determining the speed of recovery?

With the sudden and big shock in Q1, a V-shaped rebound is likely. This means Q1 growth q/q will be strong, but do not expect a strong y/y growth, or back to "growth as usual". The key factor is the speed of virus control, and the speed of work resumption.

11. Why are you and others not forecasting a long lasting impact on China’s economy? Will many SME’s not go bust, leaving the economy and employment permanently weaker? Do you expect government stimulus to just make up for this?

We currently expect many small businesses to be severely impacted and some indeed may go out of business permanently. When the virus is controlled and activities normalize, however, we also expect many small businesses to re-open and be reborn. The government's tax and fee cuts, subsidies, and lending support should help reduce the negative impact on these companies. Of course there is going to be a permanent loss of output and income. What we say is the long term trend of GROWTH will not be impacted.

12. How will the outbreak impact China’s consumption pattern?

The outbreak will hit consumption pretty hard in Q1 and in 2020. Some consumption will likely be delayed and come back — for example, buying big ticket items like cars — but some consumption will be lost, such as dining out and hotel stays. As China's long term growth trajectory should stay the same, China's transition to increasing consumption’s share of GDP, and continued increase in consumer markets and spending, should stay unchanged. Secondly, the virus outbreak and related extended quarantine may catalyze for new types of consumer behavior, especially online services usage (education, health care, entertainment) and e-commerce.

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