Last month, our Hong Kong-based pH Report colleague, Daniël de Blocq van Scheltinga, warned of the “Possible development (epidemic?) of the Wuhan SARS like illness, and economic impact?” His current view of developments, and their likely impact, is as follows:
Hubei, the epicentre of the corona virus epidemic, is a province in central China, where the famous Three Gorges Dam is located. It has a 59m population (around the same as the UK) and is known as the birthplace of modern industry in China. Today, it is the most important industrial manufacturing province in the country.
Wuhan is the capital, with 11m population. Its central location means it is also the largest comprehensive transport and logistics hub in China, with rail and road connections to all surrounding provinces. 430 high speed trains arrive in Wuhan every day, the airport has 3m passengers a month, and the port on the Yangtze River handles a large part of the 3bn tonnes of cargo that passes down the river each year.
Hubei’s GDP is $595bn, equal to Poland and Taiwan. Automotive, chemicals, steel, textile and machinery are all major local industries. Honda, Nissan, PSA, Renault, Dongfeng all have their most important production facilities in Hubei, as do companies such as Siemens, GE, Corning, Beiersdorf, and more recently Xiaomi. Their supply chains include thousands of Chinese companies – who are often supplying both domestic and international markets.
Financial markets are ignoring the economic impact for the moment. But they will wake up with a bump very soon:
- The ’best case scenario’ from a leading Shanghai expert is that: “Treatment of all patients will be completed in two to four weeks, and the national epidemic will be brought under control in two to three months
- The second order impacts are spreading fast. Oil demand is expected to be down by 3.2mbd in February, and LNG prices are already at all-time lows due to Chinese force majeures, Auto factories in China have postponed their restart and some are being retooled to make masks. Major factories outside Hubei, including Boeing in Zhoushan have stopped production. Trucking fleets have been taken away from normal duties to maintain food supplies. Asian manufacturing is already slowing as China’s demand slows and supply chains are disrupted. China is the world’s largest market for petrochemicals and the virus has already reduced demand for most products – polyethylene demand will be down by at least 1.5Mt
- Domestic demand is being badly hit – cinemas are shut and holiday spending over Lunar New Year holiday collapsed as people were told to keep indoors. Car-buying and property (the latter is 25% of GDP) are now likely to be badly hit. Thousands of Starbucks, Nike, Yum (which owns KFC and Pizza Hut), and Apple stores are shut, with others on shorter opening hours
- Services inside and outside China are also impacted. 180m Chinese went abroad in 2018, spending $277bn. These visits have almost completely disappeared as have inbound visits to China. The airline, hotel, car rental, and luxury industries are all already suffering. Employees returning to Shanghai’s vast Pudong business district have been told to remain in quarantine for 14 days, as have many millions returning to other cities
The IMF had again reduced its global growth forecasts last month, before the corona virus epidemic. China is over 15% of global GDP and has been central to global GDP growth since 2008. No other country can replace it. As the Wall Street Journal warned:
“The world is now more dependent than ever on China for key goods and services, increasing the virus’s impact on the global economy.”
The US trade war had already weakened its economy. The corona virus impact will take growth well below the forecast 6% in H1. The virus also presents a political challenge to President Xi Jinping, which could lead to a scaling back of his reform programme.
Overall, therefore, it is clear that the economic impact will be severe, both inside China and across the outside.
At best, therefore, companies and investors should develop their contingency plans on the basis that China will effectively be out of the global economy till the end of Q1, and that the total impact will not be fully unwound until the middle of Q2. And they should recognise that this relatively optimistic outlook depends on the assumption that warm weather from April/May will effectively kill off the virus, as it did with SARS in 2003.
As Daniel advises, “Fasten your seatbelts!”