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Fundamental strengths

By HU ANGANG/LIU SHENGLONG | China Daily Global | Updated: 2020-02-27 11:54


Since its outbreak in China, the impacts of the novel coronavirus have been spreading. In addition to the negative effects on China's own economic development, there is now international concern as to how the outbreak will affect the global economy. China is currently the largest economy (based on purchasing power parity), ranking top in terms of industrial output, import volume of goods and energy and international tourism spending. Moreover, China is the largest trade partner of more than half of the world's countries and regions. Indeed, China is now the largest stakeholder in the world, and the country's ability to mitigate the economic impact of the outbreak will have huge implications for global economic expansion.

The dynamics between China and the world can be better understood through an illustration of the differences between China's international position today, compared with that during the 2003 severe acute respiratory syndrome (SARS) outbreak.

First of all, the percentage of China's GDP in world GDP grew from 8.7 percent in 2003 to 18.6 percent in 2018, an increase of 10 percentage points. In terms of global trade, China's trade volume (both imports and exports) is 5.43 times greater now than it was in 2003, while China's share of the world trade volume has increased by 7.1 percentage points, from 4.4 percent in 2002 to 11.5 percent in 2019. Consequently, China's impact on global trade is now 5.43 times greater in absolute terms, or relatively 7.1 percent.

However, as the novel coronavirus outbreak is a shock with a short-term and random nature, its actual global economic impact will be dependent on China's economic fundamentals, long-term factors and macroeconomic regulation capacity.

As the outbreak may possibly reach its peak by the end of February, the national economy in the first quarter will reduce sharply to 5 percent (year-on-year growth slowed by 1.4 percentage points). However, with effective macroeconomic control and the full recovery of production once people return to work, GDP growth will recover quickly in subsequent quarters. Therefore, the overall GDP growth in 2020 is expected to be 5.6 percent, 0.4 percentage points lower than would have been the case if the outbreak had not occurred.

As a result, global economic growth will be 3.1 percent, which is lower than the 3.3 percent previously predicted by the World Bank, but still higher than the 2.9 percent in 2019. Our projection is in accordance with Oxford Economics. Furthermore, China will continue to lead the global economy, as China's percentage in the world GDP will rise from 18.7 percent to 19.7 percent, and China's growth still constitutes one-third of the global growth.

The above data show that the outbreak cannot stop China's economic growth geared at medium high speed, nor can it change the upward trend of China's GDP as a percentage of the world total. China's status as the largest engine of world growth will remain unchanged.

In addition to the global impact of the outbreak, we have also calculated the outbreak's influence on seven major economies, namely the United States, India, Japan, Germany, Russia, the Republic of Korea, and Australia. Overall, the influence on these seven economies falls in a range between 0.1 percent to 0.3 percent, depending mainly on the gaps between their potential and actual economic growth, and on their macroeconomic regulation capacities.

For example, India's potential economic growth is around 6 percent, while its actual rate in 2019 was 4.9 percent; hence, even taking account of the effects of the outbreak, its growth will not slow down.

The United States will receive the least impact, at 0.1 percent. However, if the second round of the US-China trade deal comes to terms, the impact might be higher, at between 0.1 percent and 0.2 percent.

The US and China are each the largest trade partner of the other, and the economic integration between them is a basic trend. It should be noted that the bilateral trade volume in goods as a percentage of US GDP grew from 2.8 percent in 2016 to 3.1 percent in 2018. If the phase one trade deal is implemented effectively, and the phase two trade deal is reached, trade and investment between the two countries will see a recovery growth rate, for example at about 10.4 percent as previously seen between 2016 and 2018. This will increase the trade dependence on each side, hence a higher degree of impact of the outbreak on the US economy.

The impact of the epidemic on Australia and the Republic of Korea is relatively large, because their dependence on China's trade is quite high. In addition, compared with other countries, they have a higher dependence on trade in services with China, especially education and tourism. Australia alone has 100,000 Chinese students.

Each country's growth is dependent on internal factors, such as development stage, potential growth rate, innovation factors, macroeconomic regulation capacity, and trade dependence.

Hu Angang is dean of the Institute of Contemporary China Studies at Tsinghua University. Liu Shenglong is a research associate of the Institute for Contemporary China Studies of Tsinghua University. The authors contributed this article to China Watch, a think tank powered by China Daily. The views do not necessarily reflect those of China Daily.

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