As China and the rest of the world tackle the novel coronavirus that began in Wuhan, the extended political and economic impacts from the crisis will test the ability of governments and the strength of societies across the globe

Even as we assess the initial political and economic risks, the situation is volatile and rapidly evolving

Photo by Macau Photo Agency

The number of those infected with the novel coronavirus is in the tens of thousands. There are reports of a community level spread in a few countries.

As the extended Lunar New Year holiday draws to a close in China, the full political and economic impacts of the pandemic are beginning to be felt. On the first day of its opening since the outbreak, the Shanghai Composite Index dropped around 9 percentage points. Major disruptions to economic and social activities are having their impact felt on businesses in the region and beyond.

The political impact of the outbreak may be most pronounced within China. The crisis will be seen as a test on the Chinese government’s, and in particular, President Xi Jinping’s leadership. If the crisis escalates further and inflicts significant damage on an already slowing Chinese economy, it would make a dent on its citizens’ perceptions of the regime’s credibility and competence.

The regime’s failure to deliver economic growth and security could undermine its justifications for authoritarian rule. There are some indications of resentment on Chinese social media chatter and in the information leaked out from quarantined zones over provincial level officials’ decision to downplay the crisis at the early stages of the outbreak. The motive of the local officials, ironically, had been to prevent a public scare.

According to analysts, the response of the local officials to downplay the outbreak is typical of top-down authoritarian governance structures. Local officials tend not to report a crisis if they believe they could address it themselves. Reporting any negative information is perceived as weakness and could affect the officials’ promotions and prospects in the CCP. But as key leaders of the CCP, President Xi Jinping and Premier Li Keqiang have now taken direct charge of handling the crisis, so any debacle would be politically damaging for the CCP’s central leadership.

Internationally, the political fallout from the crisis has been minimal. This could be due to the greater transparency of the Chinese government compared to its response during the 2003 SARS outbreak. The World Health Organisation (WHO) has repeatedly lauded the Chinese government’s efforts to contain the crisis. Chinese authorities’ decision to share the full genome sequence of the virus was welcomed by scientists around the world.

Perhaps due to this greater transparency, China has been able to garner international support and in the past weeks it has receiving aid from a number of countries. The Chinese market has also been prioritised for critical and high demand resources such as breathing masks to contain the crisis at its source. But while China has been more transparent in some aspects, there have also been serious allegations of censorship on Chinese social media sites.

In spite of international support for China, some political tension has surfaced. The Chinese government whilst restricting its citizens’ travel out of China reacted negatively when other states decided to deny entry to Chinese nationals. Beijing was not subtle in expressing its disapproval over the US response to evacuate its citizens and imposing restrictions on Chinese travellers, calling the move an “overreaction.”

But the Chinese government’s drastic measures to quarantine and restrict the air travel of its own citizens demonstrates that it understands the severity of the crisis and the rationale of foreign governments in denying entry to Chinese travellers. The Chinese government may perceive the travel blockages on its citizens as a loss of reputation, or as it is often said, as a loss of “face”.

Given Beijing’s sensitivities, a few governments calibrated their response to the outbreak by taking incremental steps in restricting travellers from China, emphasising that restrictions were based on travel history and not nationality.

In Hong Kong, the threat of infections is starting to have an unintended dissipating effect on the protest movement. Although pockets of pro-democracy demonstrations continue, for the first time in months there are signs that the protest movement might be losing momentum.

But the subsiding pro-democracy protests may not come as a relief for the HK SAR administration or its economy. The coronavirus outbreak has led to the closure of some of Hong Kong’s borders with the mainland, a move that could prove to be economically costly for Hong Kong. There have also been strikes by medical workers over the administration’s handling of the crisis.

As a result of last year’s protests, the trust between the HK SAR administration and the public has already been strained and it would be hard for the administration to convince the public in Hong Kong that it is handling the crisis effectively.

Perhaps, a silver lining in this crisis is that China might be the most well positioned state to deal with an outbreak of this scale. Since the start of the outbreak, Beijing has taken a series of drastic and draconian measures that only the Chinese state apparatus is capable of. The construction of a 1500-bed Huoshenshan hospital in the Hubei province in approximately 10 days, the mobilisation of doctors across China to the Hubei province and the use of advanced technology such as drones to monitor and broadcast information are some such measures.

China also has the most advanced and extensive infrastructure for e-payments and e-transactions that would ensure that e-commerce continues while the traditional retail sectors hunker down during the crisis. The lock down of Hubei province that includes 13 cities and millions of people, is another bold move that has no precedence. As the most affected province, quarantining Hubei might help with slowing the spread of infections, though some analysts have argued that the impact was too little and the move to quarantine came too late.

A considerable domestic economic impact is expected. According to the Plenum Group, China’s economic growth could slow by as much as 4% in the first quarter, slicing its GDP by 1.5%.

The economy of the Hubei province is approximately 5% of China’s overall GDP which is directly affected due to the containment strategy. Hubei is one of China’s major manufacturing bases with approximately 400 million potential customers. Its provincial capital Wuhan is situated on the Yangtze River Economic Belt and was ranked 11th in Foreign Policy’s List of the “Most Dynamic Cities of 2025.” Wuhan, often referred to as the Chicago of China, has an economic growth rate that is around 2 percentage points above China’s national growth rate. While the containment strategy may limit the damage to the Chinese economy to a certain extent, given central China’s importance and its interconnectedness with major Chinese economic hubs and regional economies, far reaching impacts on regional and global economies might be unavoidable.

Aviation and tourism sectors in China and across East and Southeast Asia are among the hardest hit as the spread of the infection is largely associated with international travel. Over the last decade, there has been a steady rise in tourists from China to East Asian and Southeast Asian states. With unprecedented travel restrictions, hotels, restaurants and entertainment outlets in the region are seeing much less traffic.

These sectors would continue to be directly affected if the crisis persists and travel restrictions remain in place. A few governments have offered targeted assistance to affected tourism-facing businesses which could help reduce the impact to these sectors. The closure of retail outlets and a dip in consumer confidence in China could also affect overseas businesses that consider China as their largest export market.

The quarantine and travel restrictions have also crippled the mobility of goods and workers and stalled production in major Chinese manufacturing bases. This is having a ripple effect across the region as China constitutes an important node in many of the region’s supply chains.

Some companies outside China have been forced to cease operations or reduce projected production due to disruptions in the supply chain. The Hyundai Motor Co. halted operations in South Korea due to lack of parts arriving from suppliers in China. Apple Inc. is expected to produce 5 to 10% fewer iPhones for the first quarter of 2020 than previously projected. While the precise impact on supply chains is hard to predict, these closures and reductions in production projections are a harbinger of what can be expected for the duration of the crisis.

A shortage of supplies and bottlenecks in production might affect business continuity in the short term. Businesses may have to evaluate the financial costs of not being able to deliver products to their customers. Given the increasing dependence of multinational companies on supply chains, it may be prudent to diversify their value chains and to keep additional stock for contingencies.

According to the World Economic Forum, all major infectious outbreaks and pandemics in the past had extensive impact on the global economy. The 2003 SARS epidemic resulted in a loss of over $40 billion in productivity. The Ebola outbreak in West Africa in 2014 – 2016 sliced $53 billion from the global economy. The cost of the 2009 H1N1 influenza pandemic was estimated at between $45-55 billion. Given China’s interconnectedness to the global economy, the rapid spread of the novel coronavirus is likely to have an even bigger impact on the global economy.

Editor’s note: We are pleased to have Mr. Kalicharan Veera Singam contribute two highly relevant and cogent articles to us. The AAA team extends their gratitude for his time and welcomes him on board as a Guest Writer.

By Kalicharan Veera Singam (@KalicharanVeera), Guest Writer

Kalicharan is a Researcher at the S. Rajaratnam School of International Studies (RSIS), Nanyang Technological University, Singapore. He writes on the politics of South and Southeast Asia and on Asian security issues. Most recently, he analysed the tactics of the terrorist group Abu Sayyaf, after the group’s pledge of allegiance to the so-called Islamic State.