Box: China's Economy in the Shadow of SARS

At the end of March, China’s economy was enjoying its biggest boom in six years. Foreign investors, a key engine of China’s growth, pumped a record $52 billion of direct investment into the economy last year. First-quarter growth was a sizzling 9.9 percent at a time when Europe and Japan were stumbling and the United States market was shaken by war. More than $13 billion of investment poured into China during those three months. Industrial production grew 17.5 percent year on year, exports rose 35 percent, and imports increased 40 percent. China was the place investors felt they couldn’t afford not to be. However, because of the SARS crisis, in the second quarter economic growth and investment slowed considerably.

Nevertheless, for all the turmoil brought about by the SARS epidemic, the most fundamental components of Chinese growth—low-cost manufacturing made possible by access to raw materials and cheap skilled labor, bolstered by investment from the government and from multinational firms—have generally been unaffected. China’s economy is dominated by manufacturing, which accounts for about 54 percent of GDP, while services make up 28 percent of the economy, and there the impact of SARS has been large. Agriculture, which accounts for 14 percent of the economy, is probably insulated from a SARS shock, because the vast majority of agricultural production is sold near the place it is grown, and there is no nationwide network to disrupt. Construction makes up the remaining 5 percent, and though a real estate slump could occur, there is little sign of it at this time. In a survey of 12 financial institutions, the average GDP growth estimate for China this year was 7.25 percent, down slightly from 7.6 percent before SARS.

Even though China was the epicenter of the SARS outbreak, its robust economy and domestic demand should act as a partial buffer for export-driven Asian nations, said the World Bank in a new report updating its regional outlook. Across the region, reforms made after the financial crisis of 1997-98, large current account surpluses, and nearly $800 billion in foreign reserves were cited as other cushions. SARS could reduce regional economic growth by 0.3 percentage point, while additional multiplier effects could double that figure, causing East Asia’s growth rate to slow to 5 percent from the earlier expected 5.8 percent. As for Hong Kong, which has been more seriously affected by SARS and relies heavily on tourism, the predicted 2 percent growth this year could be wiped out.

The Bank urged economies in the region to adopt a "frank, fully transparent information policy," saying it will be crucial in building trust and minimizing the economic costs of SARS. Next year growth in East Asia is likely to hit about 6 percent, the Bank predicted. The Bank is helping the Chinese government, WHO, and bilateral donors with a response program that addresses SARS management and strengthens the capacity of the country’s public health system.

Based on reports by the World Bank and the Singapore- based Far Eastern Economic Review.