MACRO/CHINA: Coronavirus threatens local economy and global supply chains

● Travel restrictions, quarantines, extended holidays, and business closures will cause economic disruption in China. ● If the infections outside Hubei proliferate, Chinese factories could shut down, affecting multinational supply chains. ● Foreign governments are showing excess caution to avoid public blame if the crisis worsens. China is in full crisis mode as it seeks to contain the outbreak of coronavirus. The Communist Party's elite Politburo Standing Committee held a special meeting during the Lunar New Year holiday to discuss crisis response. The committee established a new "leading group" led by Premier Li Keqiang to coordinate crisis response. Beyond the lockdown in Hubei province, Chinese authorities and companies have announced additional containment measures that will inflict damage on China's broader economy and affect global businesses. These include: Geographic quarantines now affect cities with a combined population of 50mn people. Beijing and other cities have suspended inter-provincial bus travel. The State Council, China's cabinet, extended the Lunar New Year holiday that was scheduled to end on 30 January through 2 February. Individual cities including Shanghai and the manufacturing hub of Suzhou have ordered closures of companies and schools lasting a week or more beyond that date. Beijing is enforcing home quarantines on recent visitors to Hubei province, even if they are showing no symptoms. Chinese businesses have instructed employees to work from home if they are returning from cities that imposed transport restrictions. China ordered travel agencies to suspended international tour groups and the sale of international flight and hotel packages. Additional measures may follow in the coming days. A key trigger will be the extent to which the epidemic spreads beyond Hubei. By evening China time on 28 January, 2,714 of 4,515 confirmed cases in the mainland were in Hubei. If the situation outside Hubei worsens significantly, nationwide restrictions will become more draconian. Factories may voluntarily delay re-opening after Lunar New Year, putting workers on furlough without pay. Even if factories do re-open, travel restrictions could prevent migrant workers from returning from their hometowns after the holiday. Restaurants and retail stores outside Hubei province could decide to close. Even if they do not close, residents may choose to avoid public places. Foreign response reflects political risks Significant uncertainty remains about the basic features of the coronavirus, such as transmission rates, mortality, and morbidity. China's health minister said that the virus has an incubation period of 14 days during which it is still contagious, but the US Centers for Disease Control and Prevention have said they had not seen evidence to support this claim. Amid such uncertainty, foreign governments are erring on the side of caution in order to avoid public blame. A copycat mentality is guiding foreign government behavior since no government wants to be perceived as less protective than a neighboring country. Hong Kong placed broad restrictions on travelers from mainland China. International banks in Hong Kong have instructed employees to work from home if they have visited mainland China over the previous 14 days. In Singapore, there are reports that schools are requiring students who have had contact with Chinese residents to stay home for 14 days. Chinese study-abroad students may be unable to return to foreign universities after holiday vacations in China. Short-run vs. long-run impact The disruptions described above are certain to affect China's first-quarter GDP negatively, with retail, restaurants, transport, and tourism most directly affected. But the long-run impact is less certain. If the scale and duration of the epidemic resemble Severe Acute Respiratory Syndrome (SARS), the effect on China's labor force and capital stock will be minimal, allowing growth to return to normal. As mentioned previously, once SARS was contained, China's economy bounced back quickly. A relatively quick wind-down of the crisis is still possible. Zhong Nanshan, the respected respiratory expert who is leading an export team advising the Chinese government, tentatively predicted on 28 January that the epidemic will reach a "climax" in seven to ten days, after which new infections will decline. Zhong, who rose to prominence during SARS and was the first official to confirm human-to-human transmission of coronavirus, is viewed as relatively insulated from government pressure to conceal negative information. If, however, Zhong's prediction proves incorrect and the crisis lasts for months or even longer, multinational companies would need to adjust their supply chains to replace Chinese factories that are closed – perhaps by adapting plans developed in response to the US-China trade war. In an extreme scenario, even Chinese office buildings could be closed. Multinationals would need to consider relocating foreign staff and seek replacements for Chinese office staff that are unable to work.

January 28, 2020

MACRO/CHINA: Coronavirus threatens local economy and global supply chains

BY Bob Herrera-Lim, Gabriel Wildau

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BY Bob Herrera-Lim, Gabriel Wildau

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