Short Read

Consequences of the Coronavirus

For the people of China and neighbouring regions, the end of January each year typically has a special place in their hearts, for Lunar New Year beckons. Yet this year, which has already been tainted by many a tragedy (such as Iran’s shooting down of a Ukrainian passenger plane), the dawn of February sees Asia captivated in a much scarier circumstance. Coronavirus, deriving from a family of viruses including the common cold, is a mysterious new disease ravaging China’s Wuhan region and spreading nationwide and across borders, with the first death outside of China recently confirmed – in the Philippines. Amidst news of over 300 deaths and nearly 14,500 cases officially confirmed by the Chinese government as of February 2 (with tens of thousands more reportedly unconfirmed), as well as reports of cases in the UK, USA and Sri Lanka, the world is truly gripped with alarm. From WHO’s declaration of the disease as a global emergency and the lockdown of 56 million Chinese people, to a tumble in the global financial markets, the consequences of the outbreak are set to rock the world.

How has China responded to the outbreak?

Such is the extent of Coronavirus outbreak that China is seriously struggling to cope with their healthcare demands, in spite of their historically high 5-year health expenditure of 6 trillion yuan (USD$ 862 billion). The healthcare system cannot cope with the massive influx of patients, as reports of deceased patients filling hospital corridors are beginning to make the rounds on social media. Eight hospitals in Hubei put out calls for proper equipment. It is certainly worrying that the necessary protective means were not in place, especially after China’s experience of the SARS epidemic. The consensus is that China’s poor response isn’t due to financial limitation, but rather inadequate decision-making by those with power.

Elderly woman Zhang Luhua suffered symptoms but was astoundingly unable to secure a test to confirm she had the virus. Her daughter Xie Jang told the press, “We have spent several thousand renminbi seeing doctors but we are still not sure if my mother is a virus carrier. Wuhan did a bad job in disease control.” China’s response has been hampered by their flawed quasi-imperial political system, where the political disparity between central Beijing government and provincial officials causes power fluctuations – this dynamic hinders the quest for solutions in major existential issues such as the outbreak.

As a follow up to their slow reaction, China is now imposing tough measures to combat contagion and mitigate spread. Fifty-six million people in China have been placed in partial quarantine, with the streets of Wuhan and other provinces turned to ghost towns. What is truly damaging is that this epidemic coincides with the Chinese New Year festival – the prospect of income from consumer spending at public events and celebrations has essentially vanished. For containment purposes, China has effectively suspended rail travel while temporarily blocking other public transport links between regions such as Wuhan, Changsha and Beijing. As well as this, domestic and overseas group tour services provided by all Chinese travel agencies have been temporarily banned, hitting China’s tourism industry hard.

What could happen to the Chinese Economy?

While it is fairly early to assert what will occur, predictions can be made from past epidemics which have plagued China. Over 2002 and 2003, the SARS virus which gripped Asia reduced China’s GDP by 1.1 per cent, and this is a bad portent for China going forward. As a result of Coronavirus, it is expected that GDP growth in China will be hindered by a contraction of aggregate demand, deriving from a reduction in household consumer spending. The outbreak is even preventing healthy people from working due to the dangers of contagion in the workplace. Due to fewer people working and disposable income taking a hit, China’s economic growth could be in trouble.

As public life essentially comes to a standstill, tourism, entertainment and catering services are all highly affected. Such segments don’t necessarily have substitutes for the spending to be subsidised so overall consumption will fall. Concerning specific Chinese New Year celebrations, the potential gains from the abnormally high spending period are lost. Household consumption is a major driver of Chinese growth – it contributed 3.5 out of 6.1 per cent of China’s overall GDP growth in 2019. This potential setback is concerning for an economy already experiencing its worst slowdown for almost thirty years!

For investors, risk aversion is a key necessity for success. Unfortunately for China, their current state of affairs epitomises risk. Alongside the spread of Coronavirus comes the danger of supply-side shocks such as a shrunken labour force and reduced labour productivity. There is also the troubling decrease in spending by domestic consumers. Not only will this disincentivise capital expenditure by Chinese companies but also, foreign TNCs will be discouraged from injecting FDI. In a time when China is looking to reignite its rapid economic growth, such a prospect will alarm those in government.

Additionally, there is a major threat to the Chinese manufacturing industry – as a result of the spread of the disease, Nissan and Renault have both threatened to remove foreign workers from their plants in China. Such redundancies would most likely reduce the productive capacity of the relevant Chinese operations. If the production of auto parts was to virtually cease, this could cast doubt on their recently signed trade deal with the United States – would China be able to produce their typical export volumes? The answer is most likely no.

What has happened to the global stock markets?

The impending economic doom is not constrained to the Chinese borders. Taking SARS as a similar example, the global economic costs of that epidemic were estimated to be as high as $50bn. With medical professionals predicting the Coronavirus to be even more deadly, just how expensive could this mystery disease be?

On a global scale, the response to the outbreak has been expectedly negative. The daunting news of an international spread of the virus has captivated investor sentiment worldwide, causing a plummeting in the financial markets. Below are some notable stock movements on January 27:

  • The Standard & Poor (S&P) 500 index fell 1.6 percentage points, which was its sharpest fall in 4 months
  • The Tokyo Nikkei 225 index fell 2 percentage points while NASDAQ fell 1.9 %
  • The American Airlines stock dropped 5.5 % while Wynn Resorts, which operates casinos in Macau, a gambling haven for the wealthy Chinese, fell by 8.1%!
  • Benchmark oil prices fell 3% to less than $59 per barrel
  • FTSE 100 dropped by 2.3% in just one day…

From this we can gauge the uncertainty and fear over Coronavirus amongst investors, causing many to relinquish their holdings in a variety of related companies.

What’s next?

It is fair to say there is currently minimal optimism over this situation, particularly from an economic standpoint. The reputable Ed Yardeni, investment strategist and president of Yardeni Research claimed, “If the current outbreak turns into a pandemic that significantly disrupts global commerce, the impact would be bad news for the global economy and corporate earnings.” If the predictions of health officials are true and the outbreak does more damage to society than SARS, the economic costs could be unprecedented.

However, Brad McMillan (chief investment officer at Commonwealth Financial Network) noted that the impact of SARS on China’s growth was not long term, and GDP increases picked up again when consumption habits reverted to normality.

Crucially, Jinping has ordered what has been branded as an ‘All-China’ response.  3 billion yuan (USD$ 400 million) has been committed to build hospitals and provide the necessary medical services which will be vital in combatting the Coronavirus.

One would hope that this outbreak is dealt with sharply, because the alternative is daunting, from both an economic and health perspective. We shouldn’t forget that it is very early days for Coronavirus – the virus itself and responses to it are likely due to change. In other words, don’t panic yet!

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