Over the course of the last week it has become abundantly clear that the fast-growing coronavirus crisis has the potential to significantly slow China’s economy at least in the short term, intensify the decoupling of the long-entwined U.S. and Chinese economies, and have a large negative impact on global trade.
“It’s the punch that you don’t see coming”
Here is a chart from Bloomberg that shows dramatically how the world’s attention has shifted from the trade war to focusing instead on the coronavirus. “Biggest risk to markets? It’s the punch that you don’t see coming that knocks you out,” tweets Bloomberg TV’s David Ingles on January 30.
One reason people are so worried about the impact of the coronavirus on the global economy and expect it to be much worse than that experienced during 2002-2003 SARS outbreak: the fact that the Chinese economy is so much more important to the world then it was 17 years ago.
“In 2002 China was still in the early stages of its great economic surge; it accounted for only around 8 percent of global manufacturing value added, far less than the shares of the U.S., Japan and Europe. Today, however, China is the workshop of the world, accounting for more than a quarter of global manufacturing,” writes Paul Krugman in the New York Times on January 30.
As for overall GDP—not just manufacturing—China’s influence too has become much larger; while in 2003 China only generated 4% of the total, last year it made up 16% of global GDP.
Busily revising down their forecasts
Fear of the impact of the virus has got economists scrambling to cut their China growth forecasts, according to The Economist’s Shanghai bureau chief Simon Rabinovitch. “One analyst (Chen Long of Plenum) thinks growth in the first quarter could slow to as little as 2% y/y, which would be China's lowest recorded rate since the death of Mao,” writes Rabinovitch in a tweet.
Goodby phase-one?
The coronavirus too is likely to make it even more difficult for China to meet the already overly ambitious purchasing targets its government offered the U.S., as part of the “phase-one” deal. “With the outbreak driving down commodity prices and placing huge swathes of Chinese territory on lockdown, analysts are warning that import targets that already seemed aspirational have become even tougher to reach. The longer the crisis lasts, the worse the damage to China’s ability to meet the purchase target,” writes Finbarr Bermingham in the South China Morning Post.
Escape clause for an “unforeseeable event”?
Meanwhile the significance of a clause in the agreement that allows the two sides to engage in further consultation, if there are delays in deal implementation because of “a natural disaster or other unforeseeable event” has a sudden relevance.
“[The coronavirus] obviously is going to have some ramifications economy-wide, which we hope will not inhibit the purchase goal that we have for this year,” U.S. Agriculture Secretary Sonny Perdue said on January 29. “We’ll have to look ahead and see. But the honest answer is we just don’t know yet.”
At least one category of imported goods—products from the U.S. that are key for epidemic control—will no longer face retaliatory tariffs, China’s Custom Tariffs Commission said on February 1, notes a tweet by CNBC’s Beijing bureau chief Eunice Yoon.
“So disgraceful and cold-blooded”…
When U.S. commerce secretary Wilbur Ross commented that the corona virus “will help to accelerate the return of jobs to North America," China’s state media, perhaps not surprisingly, reacted with anger and name-calling, saying Ross is “so disgraceful and cold-blooded.”
Not to mention, a “low blow at a difficult time”…
And it wasn’t just China reacting with strong words. In an interview with the Wall Street Journal’s Bob Davis, China expert Eswar Prasad called the Commerce Secretary’s comments a "low blow at a difficult time for China."
80% of national GDP and 90% of exports
Meanwhile scores of provinces and cities have extended the date when business resumes after the Lunar New Year holiday, a move sure to have a major impact on economic growth. “The 24 provinces, municipalities and regions in China that have told businesses not to resume work before Feb. 10 at the earliest last year accounted for more than 80% of national GDP and 90% of exports,” tweets CSIS scholar Scott Kennedy citing a CNBC report.
Who’s hurting? Everybody’s hurting.
Both the Wall Street Journal (on February 3) and the New York Times (on January 29) have good, lengthy articles which lay out how the coronavirus is wreaking havoc in the operations of multinational companies and the global economy.
Apple shuts its stores in China
And Apple, which relies on China for about a fifth of total sales, is shutting down all of its more than 40 stores in China, notes the Wall Street Journal in a separate piece on February 1.
Steady supply of cellphones?
Apple’s production network in China too is heavily affected, with in particular its supplier Foxconn’s Wuhan, Hubei factory—located at the virus epicenter—shuttered. “The work of around 13,500 Foxconn workers will be affected by the virus outbreak from China, which puts to question the steady supply of cellphones, industrial robots, and precision machined products,” writes the Taiwan News.
Semiconductors too..
Virus-struck Wuhan too is an important base for semiconductors and other hardware manufacturing, notes Paul Triolo from Eurasia Group. The continued development of domestically-produced semiconductors, of course, is a crucial plank in realizing China’s high tech ambitions.
And autos
Bloomberg News warns of “a scenario in which the coronavirus spreading rapidly across the country triggers a cascade of plant closings that lasts into mid March and reduces output by more than 1.7 million cars,” a prospect that could "threaten to end the country’s run as the world’s largest auto market."
The Last Straw
So will all this doom and gloom accelerate decoupling? The answer seems pretty obvious. “The virus could be the last straw for companies doing business in China,” says Reuters.
The ‘world’s factory’ could fall off a cliff
If the virus has not abated by March, then “China’s supply chains and status as the ‘world’s factory’ could fall off a cliff” says Liu Kaiming, head of the Institute of Contemporary Observation, in an interview with the South China Morning Post.
Social instability a risk from a wave of unemployment?
One big risk is the possibility of a fast-growing problem with unemployment in China. That could be particularly severe for China’s several hundred million migrant workers who may have no jobs to come back to after the new year holiday, with factories shut and restaurants and other service businesses closed.
The chief economist of the China Evergrande Group has called for the government to provide subsidies for low-income people to “prevent social instability caused by the potential wave of unemployment,” Bloomberg News reported on February 1.
More countries halt air travel to China
Meanwhile, it seems every day or so another country announces new restrictions on flying to and from China. The list of those who have imposed blocks now include the U.S., Australia, Singapore, Israel, Russia, The Philippines, Vietnam, Italy and Qatar, reports Bloomberg News on February 2.
In Depth/Notable
A podcast on the cost to global trade from the South China Morning Post
A commentary on the fallout of Phase 1 from the former head of the World Bank in China
“WTO Must Reform or Die” is the title of a feature story worth reading from the January 27 edition of Bloomberg Markets magazine
