by Phillip Inman, economics editor, TheGuardian, Mon 10 Feb 2020 01.00 GMT
China plays a hugely important world role – and the effects of the crisis could be choppy and lasting
At time of publication, the coronavirus had infected close to 40,000 people, the vast majority of them in China, killed more than 800 and spread to almost 30 countries. Given China’s huge importance to the global economy, the ripple effect could be choppy and lasting.
Why is China so important to the global economy?
China’s extraordinary economic surge over the past 40 years has resulted in it becoming the world’s second biggest economy, with a GDP of $13.6tn (£10.4tn) (compared with $20.5tn for the US). Annualised growth of 7% and more – way beyond the capacity of developed economies – has become the norm.
China reached this position by supplanting the US as the fulcrum of global trade. Beijing is the largest trader of merchandise in the world, and is fast catching the US in commercial services following an 18% growth spurt in 2018. The long-held practice of sourcing components and widgets from Chinese companies, and the country’s vast and growing domestic market, has encouraged thousands of foreign businesses to open their own factories on the mainland, join local distribution networks and open shops.
China is also central to a diverse range of global supply chains: much of the world’s raw materials travel to China before being turned into a manufactured product. Last year’s battle with the US over import tariffs on billions of dollars’ worth of goods illustrated the power of the Chinese economy to disrupt and disturb the global outlook.
So how is the virus affecting economic activity within China?
Most industries in China shut down over the two weeks around the lunar new year. The majority of factories were not expected to open again until this weekend and some have delayed opening until 14 February as a precaution, as tens of millions of people remained locked down in dozens of cities across the country.
Carmakers are shutting plants, coffee outlets are closed and ports are far quieter than usual. Small and medium-sized businesses, which operate on short-term contracts and with only small financial and physical reserves, are known to already be in trouble. Reports from regions across China’s central belt tell of livestock farmers only days away from running out of feed.
Wuhan, a city of about 11 million people and centre of the outbreak, is a large industrial centre, a regional hub, an important cog in the automotive industry and a magnet for foreign firms. It is the third largest education and scientific base in China, with two top-10 universities. It is impossible to think that weeks of standstill will not have a considerable impact on economic output. The Chinese president, Xi Jinping, acknowledged as much last week. In response, the authorities are redoubling efforts to shore up the economy, slashing tariffs on US imports, and making borrowing cheaper for businesses and consumers.
So what might the overall impact on China be?
China’s economy grew by 6% last year according to Beijing’s official statistics agency, which was the lowest rate for almost 30 years and a big drop from the 10.2% achieved in 2010. There were hopes that 2020 would prove to be a period of recovery following a protracted trade war during 2019 with the US Trump administration.
The coronavirus makes that unlikely. Most analysts are still predicting growth well above 5% for the Chinese economy, based on what is known so far about the virus’s spread, and the likely impact on consumers, businesses and government.
But Zhang Ming, an official in the Chinese Academy of Social Sciences, is gloomier. He told Caijing magazine: “GDP growth in the first quarter of 2020 could be about 5%, and we cannot rule out the possibility of falling below 5%.”
Gloomier still is the Enodo Economics chief economist, Diana Choyleva, who believes China’s real growth rate figure for 2019 was probably nearer 3.7% and this year will be lower than that. Some particularly gloomy analysts are warning the worse case scenario could be economic contraction.
Importantly, investors hoping for a decisive rebound once the outbreak is contained are likely to be disappointed. Choyleva points to the huge overhang of bad debts that plague China’s ageing state-run industries, as a drag on growth over several years. China’s central bank has begun to pump extra funds into the economy to maintain borrowing while the virus takes hold, mainly to boost business investment, but Choyleva said these funds, while they are cheap and plentiful, are mainly used to keep zombie companies from going bust.
Which industries are most vulnerable?
The first sectors to reel from the outbreak were the travel and tourism industries, which usually enjoy a boom during the new year holiday period. Cancelled flights and hotel bookings in China and across the Asia region, which relies on Chinese tourists, have followed the clampdown on travel to and from the big cities of China’s central belt and even from the mainland to Hong Kong. Airlines have scaled back services: Cathay Pacific plans to cut flight numbers by one-third over coming weeks and has encouraged staff to take weeks of unpaid leave.
Neil Shearing, the chief economist at Capital Economics, said: “Passenger numbers have fallen by 55% compared with the lunar new year period in 2019. And given that Chinese tourists spend a lot in Asian countries, the costs of travel bans will be felt throughout the region.
If the crisis persists, the global effect will be palpable. The Chinese made 173m visits in the 12 months to end of September last year and together they spent more than a quarter of a trillion dollars – more than any other country.
But tourism is just the start. Entire supply chains – automotive, electronic, industrial – are starting to creak. Shipping companies are reporting a sharp drop in container volumes. China also has a huge domestic market for retail and food and beverages. One indicator that really hit the skids last week, partly as a result of the virus, was the price of coffee. Starbucks alone has 4,000 outlets in China. Half of them were closed by the outbreak.
What about the stock market and other key indicators?
Asian stock markets endured a seesaw week last week, tumbling early because of a slump in retail, consumer services and transport businesses, before recovering amid hopes that the virus outbreak could be contained. Western markets largely followed suit.
But oil prices came under pressure too, amid anticipation of a slowdown in global demand, as did other raw materials. China is the world’s largest crude importer and also a big consumer of metals such as copper and iron ore.Travel companies, carmakers and luxury product outlets were among the most volatile sectors.
What do precedents tell us about the likely economic toll?
In 2002-03, Sars spread virtually unchecked to 37 countries, causing global panic, infecting more than 8,000 people and killing about 750. There are estimates that put the damage from Sars at anything between $30bn and $50bn – big numbers, but a drop in the ocean compared with global GDP which even then was worth about $35tn.
The coronavirus is spreading at a rate six times faster than Sars, mostly through human contact between people not yet showing symptoms. China is a much more open economy than it was even in 2002, and so the disruption is expected to be greater than that caused by Sars.
Which worldwide companies would be worst affected by a China slump?
Many global companies rely on suppliers based in China. For example, 290 of Apple’s 800 suppliers are based in China and the country is responsible for 9% of global TV production. According to DHL’s Resilience 360 index, 50% of all manufacturing in Wuhan is related to the automotive industry and 25% to technology supplies from the region.
Automotive executives in Europe and the US are warning they are just weeks away from shortages. Hyundai has already shut down operations in South Korea because of a lack of parts from China.
To indicate how integrated some foreign firms have become in China, the US industrial glass and ceramics maker Corning has built 19 factories across the mainland and has more than 5,000 Chinese employees. The company is planning to increase its footprint after spending $1bn on a facility to produce its state-of-the-art generation 10.5 black glass used for LCD panels.
Apple is supplied from factories in China and has a network of 42 Apple stores that it says will remain closed until 9 February. Other US retailers from Starbucks (4,200 shops) to Levi’s have closed their stores, though Levi’s only closed half its complement and China only accounts for 3% of its global sales.
… and which countries?
South-east Asia is most exposed, so tightly are local economies tied to the Chinese behemoth. (It’s worth remembering that Asia’s worst postwar financial crisis in 1997-98 was partly blamed on the devaluation of the Chinese currency).
Japan may be a richer economy, but it too is exposed. China is a big buyer of Japan’s industrial machines, its cars and trucks and technologically advanced consumer goods. Chinese-made parts go in the other direction, feeding components into Japanese factories.
And then there are the millions of Chinese tourists who visit their eastern neighbour each year. Already Japan is bracing for cancellations from 400,000 people in the first quarter of 2020.
Australia’s economy is tightly interconnected with China too, and the prime minister, Scott Morrison, warned last week of “a real weight on the economy”. Even Australian universities are suffering because far fewer Chinese students have returned to enrol for the new academic year.
How might Britain be affected?
The UK, like other European countries, is in a position to limit the flow of Chinese visitors without a huge impact on the economy, though designer outlet shopping centres such as Oxfordshire’s Bicester Village will see a severe downturn if Chinese visitors stay away for any length of time.
The broader impact will be felt if global trade, as expected, begins to slow. Britain is plugged in to the all the big economies and for that reason always catches a cold when the global economy sneezes. Last year UK manufacturing went into recession in response to the tariff war between the US and China, which hit global trade.
Could it derail the US economy sufficiently to affect the election this autumn?
There is anecdotal evidence that the impact of the virus is rippling through small American businesses.
US companies may find it difficult to access components for their manufactured goods, plunging a recovering manufacturing sector back into the long recession it suffered last year. Factory closures or shutdowns in the US heartland states of Ohio and Pennsylvania could cause problems for Trump’s re-election campaign, which relied heavily on bringing industrial jobs to these states.
But November is still nine months away, and as yet it is hard to say whether the effects of the virus will last that long.
So what will be the overall impact on the global economy?
Economists are cautiously speculating that the perhaps 0.3 percentage points may be shaved off global growth, though it would remain somewhere around the 3% mark.
Christian Keller, the head of economics research at Barclays, said the impact on the world economy could range from almost no change to his current global growth forecast of 3.3% for 2020 to growth of about 3%. Others are gloomier still, warning that if the virus continues to spread and Chinese activity remains deeply disrupted for months, a contraction of the global economy is not impossible, particularly as central banks have little effective monetary ammunition for emergencies.
“There is a risk that an adverse feedback mechanism and limited space for policy response could push the global economy towards recession,” said Keller.
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