[The Editors' Verdict] The Novel Coronavirus and the Economy... China's Dilemma

The Chinese authorities are facing a dilemma due to the novel coronavirus infection (Wuhan pneumonia). The novel coronavirus is infecting 3,000 to 4,000 people daily in China. With its rapid spread, the World Health Organization (WHO) has declared a state of emergency. Therefore, the Chinese government has no choice but to implement ultra-strict measures such as controlling public transportation like airplanes and trains, and banning group travel. The problem is that the economy is freezing. Since people are reluctant to gather, factory operating rates are falling, and consumption is not happening properly.

In particular, the stock market most sensitively reflects the economic situation. On the 3rd, as soon as the Chinese mainland stock market opened, investors who had been anxious during the ten-day Lunar New Year holiday began a massive sell-off. The Shanghai Composite Index plunged as much as 9% at one point. Chinese financial authorities stepped in to stabilize the market. The People's Bank of China, the central bank, supplied an enormous amount of 1.2 trillion yuan and lowered interest rates. The Securities Regulatory Commission also issued a series of ultra-strict measures such as suspending short selling and banning net selling by securities firms' proprietary accounts.

However, while these measures may somewhat help stabilize the financial market, they are difficult to see as measures to stabilize the real economy. In the current situation where consumption is frozen, large-scale public investment can be considered an effective measure. But since people cannot gather, there seems to be no way. Not only Wuhan City and Hebei Province but also Shanghai and Guangdong Province, which are key production areas in China, have temporarily suspended business operations, and Beijing is also required to work from home until the 9th. Of course, preventing the spread of the novel coronavirus is the top priority now, and all measures are being mobilized. However, the stronger the novel coronavirus measures, the greater the damage to the economy and industry. This is because there is a trade-off between the novel coronavirus and economic stability.

The impact of the novel coronavirus on the Chinese economy is expected to become more severe. The market expects the spread of the novel coronavirus to slow down within the first quarter, similar to the SARS outbreak. Growth is expected to recover after the second quarter of this year, but the decline in growth rate in the first quarter is expected to be much stronger than during SARS. A decline pressure of about 1% is anticipated. Many opinions expect this year's growth rate to fall short of the initially forecasted 6%, reaching only 5.7 to 5.8%.

The low growth rate is mainly attributed to the greatly increased influence of personal consumption on GDP (Gross Domestic Product). During the 2003 SARS outbreak, the share of personal consumption in GDP was 30 to 40%, whereas now it is about 70%, more than double. This means that the impact of reduced consumption on GDP is significant.

The production disruption caused by the lockdown of Wuhan City also affects the growth rate. Due to the novel coronavirus, 15 cities in Hebei Province, including Wuhan City, and many cities such as Wenzhou in Zhejiang Province have been locked down. Wuhan City has long been called Guseongtonggu (九省通衢, the thoroughfare connecting nine provinces) in China, serving as a transportation hub and a key city in the central economy. Industrially, it hosts core industries such as automobiles, high-tech, and materials, making it a central area for Made in China 2025.

The fact that the Chinese economy is in a low-growth phase also has an impact. During the SARS outbreak, China was in a high-growth phase with nearly double-digit growth, allowing for a rapid recovery. However, now the growth rate is barely holding at 6%, and corporate debt is high, limiting the ability to implement bold economic expansion policies.

What about South Korea? So far, overseas institutions have not shown signs of downgrading South Korea's growth rate. However, South Korea has also seen a decrease in Youke (Chinese tourists), and Korean citizens are reluctant to attend gatherings or travel. In this situation, a decrease in consumer goods purchases is inevitable. Moreover, as seen in the automobile industry, disruptions in the Chinese supply chain are causing production delays in South Korea as well, leading to manufacturing issues, so comprehensive measures are urgently needed. Although recent financial stability measures have been introduced, South Korea, with 25% of its exports going to China, urgently needs meticulous scenario analysis and countermeasures.

Jeong Yushin, Dean of the Graduate School of Technology Management at Sogang University and Director of the Kochai Economic and Financial Research Institute

This content was produced with the assistance of AI translation services.