A coronavirus paralyzing China threatens the economy of the whole world. This is due to the vulnerability of the global system and the growing role of China in the global economy over the past decades. The author gives several figures to confirm his forecast.
The indifference with which markets initially reacted to the ubiquity of coronavirus has begun to give way in recent days to the growing concern that global growth seems to decline in the first quarter of 2020.
Why is a virus that has predominantly paralyzed China threatens the economy of the whole world? If we analyze the relevant data, we can see the vulnerability of the global system and the growing role of China in the global economy over the past decades.
The fact is that over the past twenty years, truly revolutionary changes have occurred in China: from a huge poor country with a relatively modest economy, thanks to a focused policy, it has turned into a country holding the second place in the world in terms of general economic indicators. And this is not only a matter of China: for example, India, the second most populous country in the world, takes the sixth place in this rating. In 2010, China overtook Japan in terms of economy, taking second place after the United States.
China’s GDP is about 19 percent of global GDP, and the more powerful the country’s economy, the more noticeable and more significant is the damage caused by the sudden recession of this economy. The recession of the Chinese economy caused by the coronavirus epidemic will affect both the global economy and the economies of many countries associated with China.
After the 2008 crisis, the global economy was characterized by low growth rates and, according to IMF estimates, by 2019 it grew by only 2.9 percent. It should be noted that over the past decade, low growth rates were due to the slowdown in European countries and North America. In China, growth was 6.1 percent, but this figure was achieved after a sharp decline in the last decade, given the fact that in 2010 it amounted to more than 12 percent in China.
According to the IMF, 39 percent of global growth in 2019 was the result of China’s economic activity. The policy of the superpower is to maintain high growth at any cost in order to “catch up” in the 20th century. That is why China pursues an aggressive policy of encouraging growth and output, which makes it one of the most dynamic factors in the global economy.
Developing countries have turned China into an industrial world zone, and now it has also turned out to be the world’s largest exporter; for example, in 2018, 13 percent of all world exports accounted for China. That is why the closure of factories in China can cause serious damage to various companies scattered around the world – those that rely on Chinese-made products. For example, in Israel, firms such as Tadiran and Tornado have already admitted that there are problems in the production chain and it seems that the situation will only get worse over time.
In turn, Chinese industry is considered the world’s largest importer: about 11 percent of world imports go to China, mainly industrial raw materials and components for the electronics industry. The decline in imports and exports from China is already beginning to be felt.
Most of the products or products that we purchase are manufactured not in one place, and often not even in one country. China is one of the most important nodes in the global supply chain, and a significant part of the product, or parts of it, or parts of these products, at some point passed through China. According to Bloomberg, in 2015, about 20 percent of manufactured products or their components passed through China. Thus, the large-scale damage caused to the Chinese industry due to the epidemic, as well as the result of government directives on the closure of enterprises, can lead to disruption in the smooth operation of the global supply chain and, in the short term, damage to companies that rely on Chinese production.
In recent years, when China has developed rapidly, a huge middle class has appeared here and many Chinese people who previously lived in relative poverty have now begun to live much better, in accordance with the standard of living of the middle class in the West. The fact that Chinese income has increased has affected foreign tourism: the number of Chinese traveling around the world has grown significantly. Moreover, they became one of the largest sources of tourism in the world, and in 2018, Chinese citizens accounted for 21 percent of the expenses of the global tourism industry.
Thus, a recession or slowdown in China, which will lead to lower middle-class incomes and even slower growth of the Chinese middle class, is likely to cause a severe blow to the global tourism industry, even without taking into account the restrictions imposed on leaving the country and on entering to other countries.