Economic impacts becoming apparent amid virus scare

Companies with sizeable presence in China, like American fast food giant McDonald’s, have endured a tough time. Photo: AFP

Chinese provinces making up almost 70 per cent of the country’s GDP remained closed for more than an extra week after the annual Lunar New Year holiday, shutting factories, stores, and restaurants, damaging household spending, and more besides.

Restrictions on travel over the past week have limited movement of nearly 50 million people there, with the manufacturing hub of Wuhan most impacted. The coronavirus, or nCoV, is believed to have originated at a market featuring live animals in Wuhan city in December.

City centre streets are still largely empty even after citizens went back to work last week. Thousands of entertainment amenities have remained closed to prevent crowds from gathering – China had also shut virtually all of its cinemas, an action that is expected to result in a $1 billion-plus hit to the global box office in 2020, in the world’s second-biggest movie market after the United States.

Food and beverage staples such as McDonald’s and Starbucks have closed stores or reduced service drastically in China. Starbucks said the outbreak could hit its bottom line after it shut around half of its more than 4,000 coffee shops. “Starbucks will continue to modify the operating hours of all our stores in the market in response to the outbreak of the coronavirus,” the group said in a statement last week.

Elsewhere, Disney said income from operations could be cut by $175 million after it closed two theme parks over the holiday, and Swedish furniture retailer Ikea has closed all 30 of its stores in China.

Popular hotel brands such as Marriott, InterContinental, Hilton and more were offering free reservation changes or cancellations in China and select other locations last week.

Production of vital items across various sectors has also been hit by the health crisis. In aviation, Airbus stopped its Tianjin production line at a facility that would build up to six A320 aircraft each month.

Hyundai, the world’s fifth-largest automobile producer, last week suspended production lines at its South Korean factories. The company became one of the first major manufacturers to face severe supply chain issues due to the outbreak. Hyundai heavily relies on parts from China.

Many other car plants in China have also shut down, such as those operated by Ford, Nissan, and Tesla. Toyata on Friday extended closure of all 12 factories in the country by an extra week, while VW Group, the biggest overseas carmaker there, has asked over 3,000 employees in Beijing to work from home for a fortnight.

Also working from home are employees of GSK, one of Britain’s largest drugmakers, after its medicine packaging building in Tianjin, which employs around 100 people, remained closed after the extended new year holiday. The group boasts a total of 3,000 employees across China, many of whom are also attempting to work at home in the meantime.

In tech, operations are also being downsized. Apple planned to keep all corporate offices and stores in mainland China shut until February 9, stating it was “out of an abundance of caution and based on the latest advice from leading health experts.”

Cross-border troubles

The number of Chinese citizens visiting abroad has snowballed in recent years, rising from only 10.5 million at the start of the century, to 150 million people in 2018. As a result, tourism is likely to be one of the worst-affected industries on a global scale, as cross-border travel is curtailed in an attempt to control the spread of coronavirus.

As previously reported, major airlines worldwide have suspended or cancelled flights, including. Eastern was the first major Chinese carrier to suspend flights between China and the United States, while Cathay Pacific Airways said several days ago that it will cut almost a third of its capacity over the next two months.

The knock-on effects outside mainland China and into Southeast Asia continue to roll on. On Tuesday, the Chinese gambling enclave of Macau decided to close casinos for two weeks as a precaution. Macau has traditionally been a big money-maker for Ameri-can casino operators such as Wynn Resorts and Las Vegas Sands Corporation.

In Thailand, tourism could be damaged significantly. Chinese tourism alone makes up about 4 per cent of GDP there, according to Capital Economics. The country’s central bank cut interest rates on Wednesday to an all-time low of 1 per cent, putting part of the blame on the virus outbreak.

Popular tourist destinations, such as Bali in Indonesia, face major issues too. The country’s travel agent association reported that 10,000 Chinese tourists halted trips to the island in a single day.

The extent to which the outbreak is harming groups of all shapes and sizes continues to make a mark. In Europe, mink breeders in Denmark cancelled a fur auction because Chinese buyers were not able to attend due to the travel restrictions. The co-operative of around 1,500 Danish breeders, who account for 40 per cent of global mink production, scrapped this month’s auction of two million skins. Most of the group’s exports usually go to China and Hong Kong.

Italy could lose up to $5 billion in tourism revenue this year alone as visitors stay away in the wake of virus cases reaching southern Europe, polling agency Demoskopika said in a study released last week.

In Milan’s luxury shopping district, suitably decorated for Chinese New Year, a slew of top-class brands were left disappointed as wealthy Chinese shoppers simply failed to show up in usual numbers. Shoppers from China make up around one-third of all luxury purchases in the world.

The Italian National Fashion Chamber estimated that industry sales will drop nearly 2 per cent over the first six months of the year, when it had been expected to grow 3 per cent prior to the arrival of the coronavirus.

Elsewhere, LG was the first major technology company to pull out of the Mobile World Congress event due to take place in Barcelona later this month, over concerns about the outbreak. In a statement, LG said, “This decision removes the risk of exposing hundreds of employees to international travel, which has already become more restrictive as the virus continues to spread across borders. In lieu of its participation, LG will be holding separate events in the near future to announce its 2020 mobile products.”

A number of other technology companies including Huawei, Sony, Microsoft, and Samsung are still due to appear at the event.

Uncertain in the short term

Officials in the country express confidence that China can weather the storm, but forecasters have said the outbreak could shave up to 1 per cent off 2020 growth, which might fall to as low as 5.2 per cent. Growth was previously projected to slow after hitting a multi-decade low of 6.1 per cent in 2019. Experts including Barclays and Morgan Stanley say the outbreak could depress this year’s global economic growth by 0.2-0.4 per cent, although many are at pains to point out that it could still be too early in the spread of the virus to predict anything confidently.

China suffered similar issues during the SARS outbreak, but growth rebounded quickly afterwards, and the impact worldwide was ultimately limited. This time around the global effects could be more serious than SARS, according to the forecasters, as China now makes up over 16 per cent of the world’s economic activity, more than triple the share of 4.3 per cent back in 2003, according to the International Monetary Fund.

China is the largest exporter of intermediate manufactured goods that can be resold between industries or used to produce other things, so the issue is quickly felt in global supply chains. The world’s reliance on these products, classed as a semi-finished item that may require further processing before it is saleable, doubled to 20 per cent between 2005 and 2015.

The supply chain in Asia, which imports about 40 per cent of intermediate items from China, has the biggest exposure, according to a Bloomberg Economics analysis, while the US imported about 10 per cent of such goods from Chinese plants.

“Finding alternative supplies will be particularly hard for products in which China is a dominant supplier globally,” Bloomberg economist Maeva Cousin said.

Even in a fairly-positive scenario, China’s first-quarter GDP growth may slip to 4.5 per cent on-year, according to the Bloomberg economists. That would be a dip from 6 per cent in the final quarter of last year, and the lowest since data began back in 1992.

Phillip Braun, professor of finance at Kellogg School of Management, wrote for Forbes on the difficulties companies face when relying too much on a single location or country. “The coronavirus is having an elongated impact on operations, which adds to the uncertainty for both the day-to-day, and how the supply chain should be managed later,” Braun said. “Manufacturers, tech firms, consumer products companies, and retailers need to evaluate whether they are over-invested in China or any other country. If so, they need to weigh up how best to diversify their supply chains, just as they diversify among suppliers.”

Experts at Capital Economics said there was so far little data coming out of China to make a proper judgment but noted the rise in cases in comparison to the SARS outbreak.

“If disruption fades soon, there is still a chance that employment and incomes will be relatively unaffected,” the group stated. “In this case, consumer spending may simply be deferred temporarily, resulting in a strong rebound in the domestic demand later this year, as what happened with SARS. But the longer the outbreak drags on, the greater the risk of a hit to employment and a more permanent loss of output.”