Deadly Coronavirus Threatens Weak Chinese Economy

The death toll is climbing by the hour.  The deadly infectious coronavirus, which started in Wuhan, China, has claimed 81 lives and counting.  Thousands are infected in that country with the risk that it could spread to hundreds of thousands, if not millions, more.  And there could be one huge victim, the Chinese economy.

The consensus is that in the short term, economic output will be hit as Chinese authorities step up preventive measures, impose travel restrictions and extend the Lunar New Year holidays to limit the spread of the virus.

Millions who usually travel during this period have canceled their plans, with the government ordering that full refunds be provided to air and rail passengers.

This is the equivalent of China’s Christmas, when workers employed far from home travel to their villages with gifts for relatives.  Imagine canceling Christmas in the U.S.

Shanghai said on Monday that companies cannot restart operations before Feb. 9, and businesses in the eastern Chinese manufacturing hub of Suzhou have been ordered to stay shut until at least Feb. 8.

In a desperate attempt to salvage some of the economic power of the holiday, the government has lengthened the week-long Lunar New Year vacation nationally by three days.

The city of origin for the virus has a population of 11 million and is on virtual lockdown.  The government has imposed severe limits on movement in Wuhan as well as several other Chinese cities.

Many analysts are comparing this oubreak to the Severe Acute Respiratory Syndrome (SARS), a coronavirus that originated in China and killed nearly 800 people globally in 2002 and 2003.

Larry Hu of Macquarie Capital, in a note to clients, pointed out that transportation, retail, and restaurants suffered during that time, but the economy rebounded quickly. This time, the Chinese might not be so lucky.

Back then, the Chinese relied heavily on exports to fund GDP growth.  Over the last decade, Chinese officials have worked hard to recenter the economy on domestic consumption.  That makes China more self-reliant, but it also puts the country at risk when the domestic economy falters.

Analysts from S&P Global Ratings wrote in a note:

“In China during 2019, consumption contributed about 3.5 percentage points to the overall real GDP growth rate of 6.1%. A back of the envelope calculation suggests that if spending on such services fell by 10%, overall GDP growth would fall by about 1.2 percentage points.”

That would be a $125 billion hit.

The usual Lunar New Year rush of spending on travel, tourism and entertainment is taking a beating already. Overall passenger travel declined by nearly 29% from a year earlier on the first day of the Lunar New Year, a transportation ministry official said.

The economic effects could then spread to the rest of the world.  As the Chinese economy slows, consumers will purchase fewer imported goods, affecting everything from iPhones to high-end jewelry.

Worries over the disease began hitting global equities at the end of last week, and investors are waking up to more red ink this morning.



China also now contributes more to global economic growth than it did 17 years ago, meaning any big domestic impact stemming from the virus will ripple through worldwide.

World shares fell to their lowest in two weeks on Monday on virus concerns, with demand spiking for safe-haven assets such as Japanese yen and Treasury notes.

Regions reliant on tourism, especially Chinese tourists, like Hong Kong, Thailand, Vietnam, Singapore and the Philippines seem most at risk of spillover effects from the virus, said Louis Kuijs, Head of Asia Economics at Oxford Economics, in an email to Reuters.

The virus has already spread to more than 10 countries, including the United States, France, Australia, and Singapore, although all the 81 deaths have so far occurred in China.

Singapore, the Southeast Asian financial and tourism hub, earlier on Monday warned of an economic hit from the outbreak.

“We certainly expect there to be an impact on our economy, business and consumer confidence this year especially as the situation is expected to persist for some time,” Singapore’s trade minister Chan Chun Sing said Monday.

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