Morgan Stanley: SARS a testbed for China's credibility and transparency

  • Business
  • Thursday, 15 May 2003

THE Severe Acute Respiratory Syndrome (SARS) outbreak may be a blight on China now, but it could also be a blessing in disguise. 

SARS might well go down in history as a watershed event for emerging China, Morgan Stanley said, but to the extent that it learned from this potentially devastating experience, the nation emerged all the stronger. 

In a global equity research report, Morgan Stanley chief economist Stephen Roach said it would be a huge mistake to turn negative on China because of SARS. 

“At times like this, it is critical to look beyond the shock and focus on the fundamental forces that will shape the post-shock climate. 

“In that vein, it is equally important to assess how those fundamentals might be affected by China's response to SARS. From that standpoint, I am encouraged,” he said. 

Roach cited three main reasons for his optimism. 

First, he said the new Chinese leadership of president Hu Jintao and premier Wen Jiabao seemed to have risen to the occasion, demonstrating a new and independent leadership by their issuance of “a stunning mea culpa” with respect to the initial cover-up of SARS cases in Beijing. 

Second, transparency was now the credo in guiding the government's response to SARS, and could be an important milestone for China in coming to grips with one of its biggest problems - that of the credibility of its growth miracle. 

Roach noted that be they growth numbers, the extent of non-performing loans, or the income statements and balance sheets of Chinese companies, the information flow from China had been widely criticised as opaque at best. 

By embracing transparency on SARS, the Chinese leadership might be setting an important precedent that could be applicable in dealing with other aspects of Chinese activity, he said. 

Second quarter growth figures - expected to be weak - would be analysed carefully as another important step to China's road to transparency and credibility. 

Lastly, he said China seemed to have realised that no nation had more at stake in a globalised world than itself, which was now less inward looking and more willing to accept the outward-looking responsibilities that global leadership requires. 

Touching on the Chinese economy, Roach said that SARS' impact on the economy had already prompted Morgan Stanley to cut its 2003 growth estimate to 6.5% from its earlier projection of 7%. 

He added: “Given the extent of the disruptions to commerce, the risks to our revised forecast remain decidedly on the downside.” 

The impact thus far has been confined to the services sector, which accounts for 34% of China's gross domestic product (GDP). 

(Badly SARS-hit Beijing is China's second largest city but most service-intensive metropolitan area.) 

Even the decision to cease domestic travel during the national May holiday alone could slice 0.2% to 0.4% off annual GDP growth. 

However, the manufacturing intensive economy, which accounts for 44% of China’s GDP, is still shielded from SARS.  

“Certainly, if SARS is not contained,” Roach said, “there are risks of widespread worker absenteeism and factory shutdowns that could deal a more serious blow to China and the rest of the world.”  

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