In light of COVID-19’s economic consequences, Jim O’Neill, Chair of Chatham House, said in a recent interview with CSST that China can still ensure a high economic growth rate after the epidemic by strengthening reforms. If other countries in the world can take effective measures to quickly curb the epidemic as China has done, it will be possible for the global economy to avoid risks.

CSST: What is the epidemic’s short-term impact on China’s economy? 

O’Neill: It is quite extraordinary and problematic. In order to deal with the crisis and try to control the spread of the infectious disease, China has had to deliberately shut down much of its economy. It is therefore obvious that the longer China remains preoccupied with controlling the spread of the virus, the worse the economic impact. It is a very tricky challenge for policymakers.

Fortunately there have been strong positive signs towards the end of February that China’s efforts, especially outside of Hubei, have been successful. In turn, China is cautiously allowing the economy to recover and people to go back to work and travel. If this results in renewed transmission of the infection, that will be hugely disturbing. Hopefully that won’t happen.

In terms of GDP, Q1 will be exceptionally weak and unless policymakers can have confidence about infection control soon, annual growth could be significantly below 6%. Let’s wish policymakers success.

CSST: What is the epidemic’s impact on the global economy? 

O’Neill: The global impact is twofold. First, as many have cited, China is about four-to-five times the relative size of GDP globally today as it was when SARS hit. That makes China’s short-term weakness much more challenging for the world. Even before this, with China’s slowing, places as far as Germany quickly saw consequences. Imagine removing an Australia, one of the 20th largest economies, from the world in one quarter? That is essentially what is going on. You can see it in global firms’ business, travel, tourism and beyond.

The second hit, which is now what’s happening, is the spread to South Korea, Italy and Iran, which means all these economies have to be curtailed simultaneously. But markets worry that they won’t be able to be as successful as China in curtailing things quickly. So in this sense, there is now a third global economic danger, in that for other countries to prevent and prepare, their policymakers must also restrict business activities and people leaving their homes.

Until the third week of February, markets believed this would only be a short-term issue, but now there are rising concerns it will go beyond Q1 and have lasting effects.

CSST: What about global financial markets? Will there be long-term damage? 

O’Neill: This has also come at a difficult time for global markets. After having to deal with the issue of a slowing world economy in 2019, and also the US- China trade dispute, just as there was evidence that the world was stabilizing, this crisis is creating serious concerns in many places.

Firstly, can China reach its growth targets? Can Europe avoid recession especially as Germany was weak already, Italy is often weak and the UK is struggling with Brexit? And many markets are at all-time valuation highs, which makes them extremely vulnerable to an adverse shock. This is true for the US markets which are at an extreme high compared to historic valuations.

On top of this analysts worry, me included, whether countries have any room for compensating policies. Certainly, pursuing more quantitative easing and yet lower interest rates, other than propping up markets, hardly seems a logical response to this crisis. And some countries worry about their debt levels which may constrain the scope for fiscal stimulus. So it is easy for me to see why markets are very concerned by all of this.

All this said, if we can stop the spread in Europe as China has done, reach warmer weather, and then allow recovery, I strongly suspect markets will follow. But predicting when is extremely tough.

CSST: How do you envision China’s economic growth in the long run? 

O’Neill: In my famous BRIC research, I assumed in the decade just starting, 2021–30, China would grow by around 5.5%. Until January, I had no reason to doubt this despite many Chinese policy challenges. But now the coronavirus has to be added.

The biggest underlying reality is that China’s workforce has now peaked, so without much stronger productivity, China’s GDP will slow, hence the 5.5% assumption. But if China has additional persistent challenges such as trade and investment wars with the US, as well as battles with disease, it will be difficult.

As it relates to the virus, will Chinese consumers and producers go back to the same ways after? Will Chinese people want to travel so much? Will China lose more of its central role in the global supply chain? Many other questions remain.

This means in my view, Beijing must accelerate their desire to boost personal consumption and undertake even stronger reforms at home. I think China has to think more carefully about its engagement with the rest of the world, especially along the Belt and Road, and allow others to shape and influence this exciting project. Because this could dramatically boost trade within Asia and help propel Chinese growth to beyond 6%.

CSST: What are your suggestions for China to minimize the epidemic’s economic consequences? How to strike a balance between the needs of contagion control and a resumption of production? 

O’Neill: Obviously China can’t keep businesses shut forever as it would result in a severe recession and perhaps a financial and, indeed, a social crisis. I suspect given the apparent success in limiting the human consequences to Wuhan, China can slowly allow businesses elsewhere to return to normal, and I hope again that with warmer weather things might stabilize in Wuhan. This is hugely important.

I also hope this gives Beijing pause for reflection to think about more investment in basic sanitation and health care prevention. I have been heavily involved in anti-microbial resistance research for years, and because of that experience, it tells me that countries need to treat infectious disease prevention as a macro investment tool, as the multiplier benefits are probably large.

CSST: After the epidemic is under control, China will face the challenges and opportunities presented by the China-US phase-one trade deal. What are your suggestions in regard to this? 

O’Neill: I suspect that US-China trade disputes will probably be with us for a long time, and almost irrelevant of the US election result. China is going to have to figure out that the US has become paranoid about a number of related aspects of Chinese development. And on top of this, the US doesn’t want to lose its role as the world’s biggest economy at all, and certainly not to a model that is not the American way. I think this is quite irrational as it is normal for the most populated countries to have the largest economies, and at some point, the US will realize this might help their own citizens benefit in terms of wealth.

CSST: Some have suggested China should move into higher-value, innovative and knowledge-based sectors, what do you think? 

O’Neill: These are the high paying, high productivity jobs that all countries want, and you can’t just succeed by saying you want to, you have to be able to demonstrate competitive strengths and have brands that the rest of the world wants. This said, I think China tends to not be worth betting against, and I suspect China will make some progress.

Of more importance in my view, which is consistent, is succeeding in boosting the share of consumption in GDP to at least more than 50%, and in time, more like 60%. Then China will be more prosperous, stable and less vulnerable to US hostilities.