Working With Fear of SARS

MARGARET WARNER:

After more than a month of global efforts to stem its spread, the deadly respiratory illness known as SARS continues to take its most punishing toll in Asia.

Six more deaths were reported today, four of them in Hong Kong, bringing the number of fatalities worldwide to 171 out of nearly 3,500 suspected cases — the overwhelming number of them in China and Hong Kong.

China has reported more than 1,400 cases and 67 deaths, many in the southern province of Guangdong where it's believed SARS originated. The disease has now spread to other parts of the country.

In Hong Kong, more than 1,300 people have fallen ill– nearly as many as China– and 69 have died. In a city renowned as one of Asia's most prosperous business and financial hubs, the streets are filled with people wearing face masks.

Today, nearly 40 percent of the scheduled flights into and out of the city weren't operating. Restaurant tables sit empty, as do shopping streets like this one, usually packed with bargain-hungry tourists.

BUSINESS OWNER:

There is no business, no tourists. We are all depending on tourists. That's why we have no business in Hong Kong.

WOMAN ON STREET:

It makes you more cautious, certainly. And I certainly see it is not as busy as would I have expected it to be.

MARGARET WARNER:

Trying to restore confidence in the city's safety, authorities announced this week they would begin screening all entering and departing passengers for high fever, a warning sign of SARS.

MARGARET WARNER:

More now on the economic impact SARS is having in Hong Kong, China and throughout Asia. K.C. Fung is a professor of economics at the University of California at Santa Cruz. He's also a senior research fellow at the University of Hong Kong, and co-director of the Santa Cruz Center for International Economics. Richard Medley is the chairman of Medley Global Advisors, which provides economic and political analysis for governments, corporations, and financial institutions. Welcome, gentlemen, to you both.

Mr. Medley, how severe a blow is this to the economy? First of all, let's look at Hong Kong.

RICHARD MEDLEY:

Well, right now it's more of a kind of tourist blow. It's a blow to the internal commerce. What we worry about is if this is not contained in the next few weeks to month, this could start to become more of a prolonged blow in terms of trade. People may stop ordering things because they have to go there to do contracts. If that begins to happen in the next few weeks, this could become a several-year economic blow to a region that was already in some trouble.

MARGARET WARNER:

What would you add to that, Professor Fung, in terms of the situation in Hong Kong right now?

K.C. FUNG:

I think right now it has already cost Hong Kong about $1.7 billion. These losses occurred in the form of losses in businesses related to tourism such as restaurants, hotel, airlines and retails. In the slightly longer run, it has been estimated that the growth rate of Hong Kong will decline by about 0.5 percent.

MARGARET WARNER:

I know you talk to people there, professor, often. What is the mood like among people you know?

K.C. FUNG:

I think the mood is very pessimistic. Hong Kong is now at a juncture where it is trying to reinvent itself, and trying to figure a way out of its economic problems. So the SARS virus definitely adds to further economic problems and adds uncertainties to the economy.

MARGARET WARNER:

Back to you, Mr. Medley. Now, take this to China as a whole. Same number of cases, of course much, much bigger country. Is it having an impact there yet on tourism or on, for instance, investment or economic activity?

RICHARD MEDLEY:

Well, let me say first of all we don't know that it's the same number of cases. There is a lot of suspicion that it may be at least twice as many cases as the government scrambles to come to grips with the truth of SARS.

MARGARET WARNER:

I should have said recorded cases.

RICHARD MEDLEY:

Secondly, it is really beginning to have an impact. From what we've heard, spring trade fairs in China that are normally packed… that's where people make deals to do business later in the year or the next year, those are virtually empty like you saw the shopping streets in Hong Kong. So it's beginning to have a trade impact already in China.

And what we're afraid is if it keeps going and… you also should mention that Singapore is an affected area… the trade entrepots of Asia are all basically suffering from SARS that are making people change their plans to travel. That will become an economic impact in longer term trade flows, and I think could depress growth in China and in Hong Kong even below the current estimates which I agree with.

MARGARET WARNER:

So, have estimates been… of economic growth for 2003… I know they have been reduced for Hong Kong, have they been reduced already by analysts who do this kind of work for other parts of Asia, based on SARS?

RICHARD MEDLEY:

Everyone is kind of making up numbers now, whether it's 0.5 percent or 1.5 percent or more, will really depend on whether this thing begins to look like it is under control in the next few weeks. If not, there's really no way to talk about estimates.

And I think one other point needs to be made and that is that financial firms, which were kind of the mines and the canary because they can shut off computers and move people relatively quickly, are already beginning to move people out of Hong Kong and out of the affected areas in Guangdong Province and back to Tokyo or London and New York because people don't want to be there. They can do that first and fastest.

Other companies like manufacturing companies, obviously take a much longer time to do that. But that's the future if this doesn't come under control.

MARGARET WARNER:

Professor Fung, your thoughts on the situation in China.

K.C. FUNG:

I mean China is a much bigger country. It's hard to estimate the economic effects. But currently, the best estimate is that it has already cost China about $2.2 billion. And there are some estimates for the current year growth rate that it will decline by, again, by about 0.5 percent. Again, that's just an estimate, depending on how the eventual situation can be handled.

I think one aspect of how SARS might affect China is to look at the flow of foreign capital into China. China has now become the most attractive place to invest. In 2002, it received more than $50 billion, the largest recipient of foreign capital in the world, so most investors are interested in China because of its low cost, high quality, and at the same time, reliability.

And I think the SARS virus and the way that the Chinese government is perceived to have mishandled the case, adds to uncertainty about how reliable the economy is and how attractive the place is as a foreign direct investment.

MARGARET WARNER:

Would you agree with that, Mr. Medley that this may have shaken the confidence of foreign investors in China as not just an economy but a political system, a place to do business?

RICHARD MEDLEY:

I couldn't agree more. I think that's 100 percent right. And I think what Professor Fung was saying is very important because it's not just the impact on China, but the impact on the rest of the world. Remember, those trade flows that he was talking about going in or foreign direct investment flows going in created factories in a low-wage cost environment that helped keep inflation and prices down across the world.

If you begin to even marginally take China out of the picture for the next year or so, the pressure on prices across the world for goods is going to start to rise. Those trade– those investment flows slowing in China almost certainly mean higher prices in inflation in the rest of the world.

MARGARET WARNER:

Professor Fung, let's go back one more time to Hong Kong. As I understand it, it had already been having some economic problems. Are the SARS-related economic effects which, if it's not checked, could continue for some time until a vaccine is developed; are they the kind of things that ultimately Hong Kong would recover from, or could this be a kind of permanent blow to Hong Kong's status as a major financial sort of powerhouse in that part of the world?

K.C. FUNG:

I think Hong Kong has been undergoing tremendous transformation. Since 1997, the Asian financial crisis hit, Hong Kong has faced several severe economic setbacks including drop in prices in property, stock market prices dropped, as well as loss in competitiveness in traditional areas of strength such as light manufacturing, which has all now moved into southern China; such as finance and banking. Even in that sector a lot of the financial institutions are now moving into Shanghai.

So while I believe that eventually Hong Kong people and Hong Kong government would figure out a way out of this dilemma, but currently the mood in Hong Kong is that you cannot find a solution to this multiple problems that are facing Hong Kong. They try high-tech for a while. That didn't seem to work. They tried to bolster tourism by attracting Disney, which will open in 2005.

Unfortunately, the SARS virus hit precisely this particular sector, which is the tourism sector. So, the SARS virus may not be the final straw to add to the Hong Kong problems, but if the Hong Kong government mismanaged this, and if the Hong Kong private sector does not respond quickly, it could add to a long list of major problems facing Hong Kong.

MARGARET WARNER:

Professor Fung and Mr. Medley, thank you both.