China’s coronavirus semi-quarantine will hurt the global economy
It may affect industries from tourism to plastic flowers
THE
YU GARDEN, a 16th-century complex of pavilions and ponds in the heart
of Shanghai, is all gussied up for the Chinese new-year holiday. Its
walkways are bedecked with colourful lanterns, its stalls laden with
dumplings, its entrances flanked by dozens of security guards to handle
crowds. Just one thing is missing: people. Fearful of coronavirus, they
are staying home. “I’ll be doing well if I make a few sales today,” says
Li Xinming, manager of a silk-scarf shop. Last year Yu Garden attracted
700,000 visitors during the holiday week, peak season for it and its
merchants. This year, Mr Li says his losses might wipe out his earnings
for months to come.
The question for
China, and for the many companies and countries around the world linked
to its economy, is whether Mr Li’s travails are indicative of a much
broader problem. The obvious reference point is China’s battle with
SARS, another coronavirus, in 2003. Growth slowed sharply at the height
of the epidemic but rebounded swiftly after it was contained. Other
recent epidemics have reinforced the impression that economists should
not be overly worried, so long as good doctors are on the job. Neither
avian flu in 2006 nor swine flu in 2009 dimmed the global outlook.
Yet
even flint-hearted investors are wondering whether the new epidemic
might be worse. Stocks in Hong Kong have fallen more than 5% as reported
infections have steadily increased. Tremors have also rippled through
global markets.
The concern is less the
severity of the virus, which seems less lethal than SARS, but rather
the nature and potential duration of China’s efforts to bring the
outbreak under control. And disruption in China, the world’s
second-biggest economy, has global consequences. “It’s not the disease,
it’s the treatment,” wrote analysts with Gavekal Dragonomics, a
consultancy.The World Bank has estimated that as much as 90% of the
economic damage from epidemics stems from people’s fear of associating
with others, which leads offices and stores to close. In China, this is
being magnified by the government’s policy of isolating affected areas
and limiting interpersonal contact throughout the country. While
public-health experts debate whether this is the right approach,
economists will count the costs.
The
most direct impact is being felt in Hubei province. First Wuhan, its
capital, was placed under quarantine. Then the rest of the province,
home to 59m people, was locked down, too. Apart from food trucks and
medical supplies, little can enter its cities and villages, and few are
permitted to leave. Such a large-scale isolation is unprecedented as a
public-health strategy. Economic activity of just about any kind, short
of hospital care and movie streaming, has ground to a halt. Hubei
generates 4.5% of China’s GDP, so the closure will leave a hole.
Other
cities in China may not be under quarantine but that is what life feels
like for their residents. Instead of getting together with family and
friends, attending temple fairs and going to restaurants—all, depending
on where one lives, staples of the holiday—people have shut themselves
in. The government has encouraged them to avoid crowds; many need little
prodding.
That
will be a drag on consumption. The extent of the damage will depend on
how long it takes to stop the virus, but the timing is already rotten.
Last year retail sales topped 1trn ($144bn) yuan during the new-year
week, a third more than an average week. This year, sales are sure to
fall well short of that.
Some
industries are being hit especially hard. The holiday accounted for 9%
of China’s box-office revenues last year. This year almost all of the
country’s 11,000 cinemas are closed. Spending on domestic tourism during
the new-year week reached more than 500bn yuan last year, about 8% of
the annual total. This year, fearful of the virus, people have cancelled
trips.
There are also worries about
how the virus will affect factories and offices. Several major economic
centres, including Shanghai and Guangdong province, have extended the
new-year holiday by a week, telling companies to wait until February
10th to restart. Chinese businesses are always slow to get back up to
speed after the holiday. The extra week will make them slower, even if
some firms such as Tencent, a tech giant, let employees work from home.
Moreover, tens of millions of migrant workers, back in their hometowns
for the holiday, may wait for the epidemic to recede before crowding
onto trains and buses to return to their jobs.
I feel your pain
One crucial difference compared with SARS is China’s importance for the rest of the world. In 2003 China generated 4% of global GDP. Last year, it was 16%. The slowdown in consumption and the disruption to production will not stop at its borders.
One crucial difference compared with SARS is China’s importance for the rest of the world. In 2003 China generated 4% of global GDP. Last year, it was 16%. The slowdown in consumption and the disruption to production will not stop at its borders.
Countries
accustomed to big-spending throngs of Chinese tourists face a brutal
stretch. China’s government has ordered all tour groups to be suspended
until the virus is contained. In Thailand, authorities expect the number
of Chinese visitors will fall by 2m to 9m this year, reducing tourism
revenue by some $1.5bn. Share prices of airlines have plunged; past
epidemics have caused huge, if temporary, drops in passenger traffic,
and China is the world’s biggest outbound international travel market.
Companies
that have hitched themselves to China’s fast-growing middle class are
also vulnerable. Starbucks has temporarily closed more than half of its
4,292 cafés in China. Footfall in those still open is scarce, with some
posting signs that patrons may only enter if they are wearing face
masks. Sales of masks are, indeed, a rare bright spot for companies such
as 3M. Disney closed its resort in Shanghai for the new-year holiday,
one of its busiest weeks of the year (adding insult to injury, China has
just entered the Year of the Rat and the Chinese term for rats also
refers to mice, a fine marketing opportunity for a brand built around
them).
The closure of factories will
cascade through the global economy. Wuhan itself is a manufacturing hub,
especially for the auto industry. Nissan, Honda and General Motors,
among others, have plants there. Bloomberg ranks Wuhan 13th out of 2,000
Chinese cities for its role in supply chains. One local company,
Yangtze Optical Fibre and Cable, is the world’s biggest maker of the
wires that carry data around the planet.
Even
if the work stoppages elsewhere are milder, they, too, will be a risk
for a wide range of sectors. Some are vitally important; roughly 80% of
active ingredients for all medicines come from China. Others are less
so; China supplies nearly 90% of the world’s plastic flowers.
Many
companies were already working to reduce their reliance on China’s
factories because of its trade war with America. The virus is a powerful
reminder that, politics aside, a diversified base of suppliers is a
good insurance policy. But the past year provided a lesson in how
difficult that is; despite the tension with America, China’s share of
global exports actually increased. Companies will struggle to find
substitutes for its manufacturing muscle.
Adding
it all up, the Chinese economy is in for a grim start to the Year of
the Rat, and this will cast a shadow globally. Chen Long of Plenum, a
consultancy, thinks China’s growth could slouch to 2% year-on-year in
the first quarter, its weakest in decades, down from 6% in the final
quarter of 2019. But he expects a strong rebound when the country gets
back to normal. People long cooped up will flock to shops and
restaurants. Factories will rush to make up for lost time. To give the
recovery a push, officials will increase infrastructure spending.
The unknown is when normality might resume. In Yu Gardens, Mr Li could not wait. With business way down, he has told the three assistants in his silk-scarf shop to stay home, unpaid—typical for small businesses in China. The death toll from the coronavirus remains mercifully low. But the whole country is paying a price.
The unknown is when normality might resume. In Yu Gardens, Mr Li could not wait. With business way down, he has told the three assistants in his silk-scarf shop to stay home, unpaid—typical for small businesses in China. The death toll from the coronavirus remains mercifully low. But the whole country is paying a price.
No comments:
Post a Comment