The Economist - USA (2020-02-01)

38 International The EconomistFebruary 1st 2020

2 fallen by nearly 10% as reported infections

have steadily increased. Tremors have also

rippled through global markets.

The concern is less the severity of the vi-

rus, 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 glo-

bal consequences. “It’s not the disease, it’s

the treatment,” wrote analysts with Gave-

kal 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 af-

fected 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 nearly 60m peo-

ple, was locked down, too. Apart from food

trucks and medical supplies, little can en-

ter its cities and villages, and few are per-

mitted to leave. Such a large-scale isolation

is unprecedented as a public-health strat-

egy. Economic activity of just about any

kind, short of hospital care and movie

streaming, has ground to a halt. Hubei gen-

erates 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, de-

pending 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 tim-

ing is already rotten. Last year retail sales

exceeded 1trn ($144bn) yuan during the

new-year week, a third more than an aver-

age 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 Chi-

na’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 vi-

rus will affect factories and offices. Several

major economic centres, including Shang-

hai and Guangdong province, have extend-

ed the new-year holiday by a week, telling

companies to wait until February 10th to re-

start. 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 re-

cede 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 glo-

bal gdp. Last year, it was 16%. The slow-

down 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 vi-

rus 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 air-

lines have plunged; past epidemics have

caused huge, if temporary, drops in passen-

ger traffic, and China is the world’s biggest

outbound international travel market.

Companies that have hitched them-

selves to China’s fast-growing middle class

are also vulnerable. Starbucks has tempo-

rarily closed more than half of its 4,292 ca-

fés in China. Footfall in those still open is

scarce, with some posting signs that pa-

trons 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).

Factory closures will cascade through

the global economy. Wuhan is a manufac-

turing hub, especially for autos. Nissan,

Honda and General Motors have plants

there. Bloomberg ranks Wuhan 13th out of

2,000 Chinese cities for its role in supply

chains. One local company, Yangtze Opti-

cal Fibre and Cable, is the biggest maker of

the wires that carry data around the planet.

Even if work stoppages elsewhere in

China are milder, they will affect a wide

range of sectors. Some are vital; roughly

80% of active ingredients for all medicines

come from China. Others are less so; China

supplies 90% of the world’s plastic flowers.

Shares in Foxconn, which makes phones

for Apple, have fallen by 10%.

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 restau-

rants. Factories will rush to make up for

lost time. To give the recovery a push, offi-

cials 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 at home, unpaid—typical for small

businesses in China. The death toll from

the coronavirus is rising. And the whole

country is paying a price. 7

Isolated variables

China

Sources:Bloomberg;NationalHealthCommissionofChina;WindInfo;StateCouncil

*2019-nCoV †FirstdayofChinesenew-yearholiday

16 18 20 22 24 26 29

January 2020

27,000

26,000

28,000

29,000

30,000

0

2

4

6

8

Hang Seng

index

Cumulative confirmed

coronavirus* cases, ’000

30

15

0

-15

-30

-45

152013 20†

Passenger traffic for Chinese

new-year holiday

% change on a year earlier

Rail Air

6

4

2

0

2010 15 20

Box-office revenues during

Chinese new-year holiday

Yuan bn

nil