Pioneering Effort to Contain Virus Outbreak in Megacities

January 31, 2020

By Dan Steinbock     

Chinese government has used very strong measures to contain the spread of the coronavirus outbreak in Wuhan. The ultimate economic impact will depend on the eventual diffusion and infectiousness of the new virus.

After the outbreak of a new coronavirus (2019-nCoV) and evidence of human-to-human transmission, central government urged people to stay at home, restricted travel and cancelled major public events. That caused travel to plunge 29 percent on the first day of the Lunar New Year, but likely saved countless lives.

China extended Lunar New Year holiday to keep people at home and reduce the risk of the spread, while extending several billions of dollars to help contain the virus. As the number of the infected continues to accelerate and evidence of human-to-human transmission has been discovered in and outside China, the World Health Organization (WHO) has declared global health emergency.

While the full effect of the outbreak on the Chinese and the global economy is too early to estimate, probable impact scenarios can be assessed.


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Despite enhanced capabilities, new risks

Internationally, markets have responded to virus outbreaks with sharp but temporary reactions until the spread is halted. Recently, analysts have used as a guideline to these projections the Severe Acute Respiratory Syndrome (SARS) in 2002-3. But that’s premature.

In the early 2000s, China’s efforts to control SARS were criticized as the disease spread internationally before the global outbreak was subdued. A decade later, Chinese response to the Avian influenza (H7N9) was significantly faster, broadly praised and the disease did not spread widely.

In recent years, China has significantly strengthened its national and local surveillance systems to prevent and control diseases. Laboratory and hospital capacity have been significantly reinforced. The record in emergency management is varied at local level.

However, despite improved Chinese capabilities and Chinese authorities alerting outside bodies, including the World Health Organization, to the novel coronavirus relatively quickly, there are now new risks, due to greater global integration. In 2003, China’s air, rail and road travel was only a fraction of what it is now and most Chinese lived in the countryside. Today, China has the world’s largest logistical hubs and 60 percent of people reside in densely populated cities. That’s the reason for the effort to insulate Wuhan and other urban centers in its proximity, altogether 51 million people – which is comparable to the total population of South Korea.

The timing also differs. Unlike SARS, the current outbreak took place before the Chinese Lunar New Year, which is accompanied by the world’s largest human migration. That’s why the government took extraordinary measures to reduce the risk of accelerated spread, which may set a new norm for struggle against epidemics in megacities.

Early human and economic costs

During SARS outbreak, 8,100 people worldwide were infected, while 774 died mainly in Chinese mainland and Hong Kong; 10 percent of the total. It was determined that the basic reproduction number – the number of people a newly-infected person is likely to pass the virus to – was about 2-5.

With the coronavirus, there are currently (8 pm Wuhan time, Jan 31) 9,776 confirmed cases in China, while 213 have died; that’s less than 2.2 percent of the total. According to early research, the reproduction number is 3.3-5.5. In other words, despite similar transmissibility, mortality rate in coronavirus seems to be less fatal (currently 2.2%) relative to SARS (11%) and particularly to Middle East Respiratory Syndrome MERS (35%).

However, health authorities suggest that symptoms may not show during the 2 to 14-day incubation period for the new coronavirus, which would undermine traditional containment practices. If the new virus can be detected only after considerable collateral damage, there is worse ahead, as Chinese authorities have suggested. The implication is that the exponential stage of the virus is still ongoing.

In the mainland, the current outbreak has already hit transportation, tourism and travel, restaurants and retail, which will impair near-term consumption data, while harming stocks most exposed to consumer markets. Globally, the damage was first felt in commodities, which react fast to outbreaks that typically penalize the sales of jet fuel, diesel and gasoline. In the past four weeks, crude oil plunged 15 percent until global health experts called for calm and reason.

What analysts are now monitoring is the milestone when the number of new infections begins to decelerate because that tends to signal the turning point for sentiment as well. But that may still be some way ahead.

While all early impact scenarios are subject to great epidemiological uncertainty, economic damage in past outbreaks typically hits first household consumption and trade. And it is likely to be compounded in major regional hubs, such as Wuhan, “China’s Chicago.” As government response takes off, outbreak spending will accelerate rapidly in emergency services.

If outbreaks prove protracted, they may penalize companies’ capital expenditures, which are sensitive to demand expectations, and cause disruptions in supply chains as reduced mobility generates temporary outages. Stringent financial conditions in markets are likely to further amplify collateral damage and thereby risk aversion.

Impact on economic growth in China

Before the outbreak, China was moving toward a mild recovery. Despite US trade war, GDP growth amounted to 6.1 percent in 2019. Given progressive deceleration, which is normal after intensive industrialization, China was expected to grow by 5.8 to 6.2 percent in 2020.

After the outbreak, three scenarios prevail. In the “SARS-like impact scenario,” a sharp quarterly effect – down to or below 5 percent – would be followed by a rebound in short order. The broader impact would be relatively low and regional. The impact on annualized growth would be relatively low.

In the “accelerated impact scenario,” the adverse impact would be significantly steeper in terms of growth and damage, while a rebound would follow only later. The impact on annualized growth would prove more significant. The broader impact would prove more significant and affect global prospects.

In the “disruptive impact scenario,” the adverse impact is harder to assess. Whether natural or synthetic, the new strain occurred in the worst time (before the largest human migration) and the worst place (huge regional hub which was expected to record 7.8% growth in 2020).

It is not the only recent anomaly. Last fall, African swine fever (ASF), which had never before seen in China but now mysteriously appeared with the onset of the US trade war, decimated half of China’s pigs, which doubled pork prices and contributed to inflation causing pricy US pork exports to double in China.

The odds for two such consequent anomalies, timing and location are exceedingly low. Yet both did occur – in almost perfect sequence.

For now, central government seeks to use maximum efforts to contain the outbreak of the novel coronavirus. Over time, it is likely to boost further national and local surveillance systems, and emergency management in megacities, while protecting China against potential external bio-threats that have destabilization potential.

 About the Author:

The author is the founder of Difference Group who has served at the India, China and America Institute (USA), Shanghai Institutes for International Studies (China) and the EU Center (Singapore)  

A shorter version of the commentary was published by China Daily on January 31, 2020