EDITORIAL: China faces its black swan

Widespread fallout from the COVID-19 outbreak in China is likely to undermine the nation’s economy and those of its neighbors just as they were beginning to show signs of stabilizing in the wake of a temporary truce in the US-China trade dispute. The outbreak is also sure to dent the world economy’s already weak growth, as many nations’ fortunes have become intertwined with the world’s second-largest economy.

Although there is hope that the outbreak can be contained and limited thanks to the efforts of regional governments and healthcare experts, the effects of closing off several major Chinese cities, as well as the travel restrictions worldwide, means that businesses will be slow to resume normal operations, consumer demand will be weak, financial markets will be volatile and global trade will stagnate in the short term.

To the global economy and investors, the outbreak is like a “black swan” event — something that cannot be predicted, but has profound consequences on markets. The fallout from the disease is like a “gray rhino” incident — a threat that is clearly visible to everyone, but ignored until it is too late.

In China’s case, that points to risks from corporate debt defaults, real-estate bubbles, rising unemployment and stock market fluctuations. Pay attention to the growing uncertainty over whether Beijing has the capability to deal with black swan and gray rhino situations simultaneously, as China’s economy is expected to slow even further.

One measure of recovery is in infection rates. Companies cannot resume normal operations as long as the outbreak shows no signs of stabilizing and infection risks remain high. Travel restrictions will continue disrupting industrial supply chains, extending the duration of the current slowdown and undercutting the strength of a recovery.

Another sign of relief would be when city lockdowns and other restrictive measures imposed in Beijing, Shanghai, Guangzhou and Shenzhen — which offer a window into the Chinese economy — are loosened.

Meanwhile, whether the National People’s Congress and the National Committee of the Chinese People’s Political Consultative Conference hold their scheduled annual meetings next month will indicate that Beijing has gained control over the outbreak. A delay would signal that the Chinese authorities need more time.

The cost of the COVID-19 outbreak would also be huge for Taiwan and other regional economies, as the effects could be several times larger than the impact from SARS in 2003. Given Taiwan’s economic ties with China and the nation’s role in regional supply chains, it is feared that the short-term harm to Taiwan’s economy is unavoidable.

Taiwan’s GDP growth slowed to 4.22 percent in 2003 from 5.48 percent in 2002, according to data from the Directorate-General of Budget, Accounting and Statistics, which last week adjusted downward its forecast for GDP growth this year from 2.72 percent to 2.37 percent.

The Executive Yuan last week proposed relief measures totaling NT$60 billion (US$1.99 billion) for one year to help firms in the transportation and tourism industries buffer the impact of the COVID-19 outbreak. While the relief package, if approved by the Legislative Yuan, might temporarily help hard-hit industries, it would not be enough to support firms if the outbreak drags on.

For now, the government should maintain a conservative outlook of the effects of the outbreak and work out a comprehensive strategy to help firms endure this hardship or even stand out among their regional peers in the medium to long term.