Summary
China is so vast, populous and key to the global economy that a largescale Chinese “local epidemic event” will likely be global in terms of its ramifications, even if the disease is largely contained within China’s borders, which at present seems an unlikely outcome.
China appears to be throwing everything it has at containing the virus. Reliable numbers on cities under lockdown in China are difficult to obtain as a result of a Chinese government tendency to dodge transparency – indeed, bad news in general. But business shutdowns are in effect until at least February 10 in most provinces and municipalities – regions that account for 80% of national GDP and 90% of exports.
With factories shuttered China-wide and China accounting for some 17% of global GDP – compared to just 4% during the 2002-2003 SARS outbreak – the potential economic implications of the coronavirus are almost impossible to quantify.
But factories are shuttered China-wide, affecting international operations from Apple to Airbus, and the knock-on effects for global supply chains remain incalculable. China is home to seven out of 10 of the world’s biggest container ports, which will inevitably play out as a barometer test of global reliance on China as a manufacturing and logistics hub. `
China’s regional Southeast Asian neighbors are also at high risk, and – as the situation currently stands – it is not possible for governments, disease experts, travelers, business leaders and small business holders to judge whether the current outbreak of a novel coronavirus is a disruptive blip to life and business as usual or whether it will continue to gather force as a worldwide storm over the months ahead.
But given the sprawling size of the world’s second-largest economy and its interconnectedness with the world, that is risk enough to make precautions against yet further risk a paramount priority.
An Epidemic on the March
The 2019-nCoV, or Wuhan coronavirus, has yet to be labeled a “pandemic” but the word is increasingly making headlines. In China, cities of millions continue to go under lockdown, flights into and out of the country are being halted and business is grinding to a halt as a small but steadily growing number of infections slip across international borders.
The World Health Organization (WHO) is cautiously holding back on equating the novel coronavirus with a pandemic, defined as “the worldwide spread of a new disease,” but a growing number of disease experts expect the WHO will eventually raise it to this level. Modern pandemics such as the Spanish flu, HIV and H1N1, or the swine flu, have cumulatively led to millions of tragic deaths and were disruptive to globalization and global trade in their own various ways. But for the world in general life and trade went on.
This will undoubtedly be the case for the 2019 novel coronavirus, bearing in mind that, in the face of many unknowns, the global impacts on human health and on business can only be sketched out within a framework dictated by educated guesswork.
For the time being, this new coronavirus remains a largely local concern, with China as ground-zero for the outbreak. The problem is that China is so vast, populous and key to the global economy that a largescale Chinese “local epidemic event” is global in its ramifications, even if the disease is largely contained within China’s borders, which at present seems an unlikely outcome.
The simple reason that grounding flights in and out of China and shutting China’s borders is now unlikely to halt this particular virus is its unusual behavior compared to either the SARS or Middle East Respiratory Syndrome (MERS) coronaviruses.
“This is more and more like flu, which is like trying to stop the wind,” Michael Osterholm, the director of the Center for Infectious Disease Research and Policy at the University of Minnesota’s medical school told Bloomberg. “The seeding is out there. It’s going to take off, there’s more than enough matches thrown into the forest to set it on fire.”
All the same, China appears to be throwing everything it has at containing the virus. Reliable numbers on cities under lockdown in China are difficult to obtain as a result of a Chinese government tendency to dodge transparency – indeed, bad news in general. But business shutdowns are in effect until at least February 10 in most provinces and municipalities – regions that account for 80% of national GDP and 90% of exports, according to at least one report.
On February 4, Chinese state media announced that the annual China Import & Export Fair (Canton Fair), to be held in mid-April, would be suspended until further notice. It is the longest-running and most representative trade fair in all of China. On February 5, Tokyo Olympics organizers admitted they were “deeply worried” about the impact of the coronavirus on the global event, which starts on July 24. Shanghai’s Formula 1 Grand Prix set for April 19 is also in serious jeopardy of being cancelled. Outlier announcements such as these are leading many to question whether businesses closed until February 10 will reopen after that date.
Shuttered Factories, Grounded Flights
With factories shuttered China-wide and China accounting for some 17% of global GDP – compared to just 4% during the 2002-2003 SARS outbreak – the potential economic implications of the coronavirus are almost impossible to quantify.
On February 4, Hyundai Motor became the first major carmaker to suspend production outside China when it announced it was suspending production in South Korea. Other global carmakers – Tesla, Ford, Nissan, Honda, General motors, Volkswagen and PSA Peugeot Citroen – have extended China factory closures. Auto-sector analysts have pointed out that small, just-on-time suppliers are likely to be hardest hit amid wide-scale uncertainty.
Meanwhile, as increasing numbers of airlines ground flights into and out of China, on February 5, Cathay Pacific became the first to announce a dramatic hit on business, asking all 27,000 of its employees to take unpaid leave. “Preserving our cash is now key to protecting our business,” said Cathay CEO Augustus Tang Kin-wing.
Cathay also announced 30% cuts in flight schedules worldwide and 90% to China for two months. The WHO has advised against halting flights to China. But, as widely reported, some 40 airlines have grounded more than 25,000 China flights anyway. On February 5, Airbus SE announced it was halting its production line at its Tianjin factory, which accounts for 10% of the French company’s production.
The knock-on effects for global supply chains also remain incalculable. China is home to seven out of 10 of the world’s biggest container ports, which will inevitably play out as a barometer test of global reliance on China as a manufacturing and logistics hub. `
Copper prices, another measure of global economic health, have been in a steady downward spiral since mid-January. “The concern is, this is another shock to the global economy and manufacturing after the trade shocks of last year,” Jeffrey Kleintop, chief global investment strategist at Charles Schwab, told media sources on February 4.
On February 5, Bloomberg reported that OPEC+ officials were meeting in Vienna for a second day of debate after a plunge in crude oil prices amid expectations of a general squeeze on the Chinese economy and a ratcheting down of consumption. Internal OPEC analysis predicts a “modest impact,” but other estimates predict “a hit to consumption” comparable to “the 2008 to 2009” financial crisis.”
Meanwhile, the People’s Bank of China (PBoC), on February 3, announced it would pump CNY 1.2 trillion (USD 173 billion) into financial markets, in a massive reverse-repo program, which has had the effect of calming global markets. But some market analysts advise against seeing such moves as a buying opportunity, particularly given that central banks have been bailing out financial markets since the 2008 global financial crisis and that an emergent coronavirus throws an incalculable element of risk into a volatile situation.
Economist Mohamed El-Erian told CNBC that bank injections have promoted a widely held belief that “liquidity can decouple us from fundamentals for a very long time … But it assumes the shock is temporary, containable and reversible.” The chief economic analyst for Allianz, added: “Those are phrases that are very hard to associate with coronavirus.”
Regional Knock-on Effects
China’s regional neighbors, at least for the moment, are at most risk of contagion from China’s health crisis, and Thailand has the highest number of infections outside of China.
For obvious reasons, the tourism sector has been of immediate concern. Thailand received an estimated 11 million Chinese tourists in 2018 – more than 30% of an estimated 41 million total. In total, tourists contribute 21.6% to the Kingdom’s GDP and employ some 6 million Thais –15.9% of the country’s employable population – according to the World Travel & Tourism Council.
But a sudden blow to Thai tourism, as China puts a chokehold on group tours abroad, is simply another shock to an economy that is already facing a phalanx of economic setbacks: a stubbornly long drought, an aging population, the strong Thai baht, high household debt, trade impacts from the US-China trade war, poor productivity, crippling air-quality levels and political uncertainty. Seen together, they could possibly conspire to make Thailand the “poor man” of Southeast Asia, as GDP growth – projected at 2.8% for 2020 by the Center for Economic and Business Forecasting of the University of the Thai Chamber of Commerce – lags behind its ASEAN neighbors.
It is not inconceivable that continued and sustained spread of the coronavirus could take Thailand into negative growth territory, at least in the first quarter of 2020. “Exports of goods would decline in line with trading partner economies and potential impacts,” the Siam Commercial Bank’s Economic Intelligence Center said in a note.
In the meantime, the effects of the coronavirus in Southeast Asia will clearly extend beyond Thailand. In the case of Vietnam, SARS, for example, had little impact on the country’s economy. In April 2003, Vietnam was the first country in the world to contain the virus, with 68 cases and five deaths. But, unlike 2003, Vietnam now plays an important role in the global supply chain, particularly in the manufacturing sector.
Vietnam’s land trade borders with China, Lao Cai and Lang Cong, are at present closed until February 8 and has grounded all flights and passenger trains to and from China.
According to one report, the sectors most likely to be affected in Vietnam are agriculture and tourism, with little effect on the garment sector because – as is the case for neighboring Cambodia – Vietnam’s garment exports to China are negligible. The same report notes likely negative impacts on healthcare, information technology, retail sales, fisheries, seaports and aviation and aviation services. As Access Asia Group noted in our previous risk briefing on the coronavirus, Vietnam also stands to gain in the long-run as this latest crisis will almost certainly lead to increased corporate flight from China – a process that is already underway – to less risky and less centrally controlled markets in Southeast Asia and elsewhere such as Vietnam, where a rapidly growing economy has been supported by favorable demographics and business-friendly policies.
As the situation currently stands, it is not possible for governments, disease experts, travelers, business leaders and small business holders to judge whether the current outbreak of a novel coronavirus is a disruptive blip to life and business as usual or whether it will continue to gather force as a worldwide storm over the months ahead.
But given the sprawling size of the world’s second-largest economy and its interconnectedness with the world, that is risk enough to make precautions against yet further risk a paramount priority.