08 February 2020

Coronavirus Costs Lives Now. China Closure Will Cost Jobs Later

The Wuhan Coronavirus epidemic is not merely a serious public health crisis in China. With currently 80 cities and over 400 million people under lockdown, it is better to think of it as a public health catastrophe.

Wuhan, Guangzhou, Wenzhou, Shenzhen, Shanghai--the list of cities brought literally to a complete standstill reads like the top of the list of China's most populous cities. The Wuhan Coronavirus has quite literally shut China almost completely down.

The official numbers (which are at this point highly dubious) paint a grim picture for China: over 34,000 confirmed cases, over 6,000 of which are serious or critical, and over 700 deaths. Just over 2,000 have recovered from the disease. Against the total number of cases, the deaths represent just over a 2% mortality rate. However, against the number of patients reported as recovered, the mortality rate is a grim 26%--if that ratio holds, as those 34,000 cases resolve towards either recovery or fatality, the ultimate number of deaths in China could easily top 9,000.

Yet, as bad as the disease is, its economic impact is likely to be even worse. Between the disease and the lockdowns and quarantines instituted by Beijing in an effort to contain the disease, virtually the whole of China's economy has been shut down

China: Closed For Business

Michael Every of Rabobank summarizes China's current economic status:
After having extended its Lunar New Year break, and yet with more cities and firms still shutting down than doing any re-opening, Beijing is starting to become cognizant of just how deep and serious the economic damage is going to be if this goes on much longer. We are, after all, talking about 80% of the economy, and 90% of exporters, simply not functioning. This is already seeing supply-chain knock-on effects for a swathe of global firms and this, very much like the virus itself, will snowball as time passes if nothing changes. For a country that was already seeing foreign firms talk about shifting production to other locations this is a problem. Thus, perhaps, some of the urgency in trying to stress that everything is returning to normal soon, and that the WHO advice is worth following - this time.
90% of exporters shut down means that, since the middle of January, virtually no goods have been produced for export--nothing is being made to be sold abroad.  While businesses are set to reopen on February 10, there is not even a pretense that China's factories will immediately resume full production. 
Huge cities including Beijing and Shanghai seem like ghost towns, with shops and restaurants closed or empty, and as containment measures including transportation curbs are enforced in many parts of the country. Some cities are keeping schools closed and restrictions on movements remain. 
Many employers in the southern technology hub of Shenzhen are taking precautions to prevent workers from returning in large crowds, asking those who have travelled from elsewhere to self-quarantine for up to 14 days.
Offices are slated to return to "normal", but factories will either remain shuttered or will be operating with a greatly reduced workforce. Foxconn, manufacturer of the Apple iPhone and most of its accessories, does not plan to reopen its factories until late February. In the technology hub city of Shenzhen, business must get official approval to reopen.
In Shenzhen, businesses looking to reopen were required to check the recent travel history of all staff and implement temperature checks and prevention measures such as providing masks. Similar guidelines were in place elsewhere.
This assumes, of course, that businesses in Shenzhen will still have workers available. When that city's quarantine measures were announced, some 95,000 people immediately fled to Hong Kong.

(Update: The sweeping cancellation of shipments of raw copper from mines in Africa and South America further underscores the depth of China's economic shutdown. While there is still hope for a second quarter rebound in these and other raw materials orders, the sobering reality is that the bottom has fallen out of much of China's resource demand.)

China Is Closed To Chinese

It is not merely that China's factories, the export engine that still powers much of their economy, are closed. Cities under lockdown are themselves almost entirely at a standstill. No one is going to work, no one is going shopping, no one is going to the movies. Personal accounts coming out of Wuhan, the epicenter of the disease, paint an almost Dante-esque picture of life under quarantine:
In the mornings, Wuhan is so quiet that bird calls sound down once busy streets. Stray dogs trot in the middle of empty expressways. Residents wrapped in masks creep out of their homes, anxiety flitting across their eyes. 
They line up at hospitals overwhelmed by a virus that most had not heard of until a few weeks ago.
They line up outside pharmacies despite the door signs declaring they have sold out of protective masks, disinfectant, surgical gloves and thermometers. They line up to buy rice, fruit and vegetables from food stores that keep operating, while nearly all other shops are closed.
Then they shuffle home to wait out this 21st-century siege. The unluckiest ones lie at home or in a hospital, stricken by pneumonia fevers that could spell death linked to coronavirus 2019-nCoV.
Scarce food and scarcer medical supplies are the only commerce that remains active in Wuhan--a city of 11 million people and the largest city in central China. 

Nor is Wuhan an isolated case. Wenzhou, a city of 9 million people and a hub of light manufacturing, is also under quarantine. Guangzhou, Shenzhen, and Shanghai are also all under quarantine. All closed for business.

China Is Closed To Outsiders

On February 4, China closed the casinos in the autonomous city of Macau for two weeks, despite having only 10 coronavirus cases at the time. The two week shutdown is projected to shave off half of casino revenues for the first quarter.
The two-week shutdown could result in gross gaming revenue in the first quarter to decline by 50% from year ago, according to a Feb. 4 note by Sanford C Bernstein. If casinos were to remain closed for the rest of the quarter, gaming revenue would show a year-on-year decline of over 70%.
This is the longest closure of casinos in Macau, and only the second in recent history, after the day-and-a-half shutdown during a 2018 typhoon.

The casino closure comes on the heels of major airlines from around the world opting to cease flights to and from China in response to the virus. Delta is halting all flights to China until April 30, and American Airlines until at least March 27. Even if Macau did not close the casinos, they are facing a reduced influx of patrons for at least the next month.

Closed For Good?

For some businesses, the question of reopening is not "when?" but "if?". Chinese small businesses have the same exposures to the uncertainties of natural calamities as small businesses everywhere--the longer they are unable to function the greater the likelihood they will never function again.
Concerns among small and medium-sized manufacturers in China over the impact of the coronavirus outbreak have risen sharply, with many worrying about going bust if the situation is not brought under control soon.
Anxiety is most acute among labour-intensive manufacturing firms, as local governments have restricted business where numerous people congregate in an effort to contain the deadly virus.
But even larger businesses have cause for concern. Coronavirus fears are accelerating efforts by many global concerns to shift their supply chains out of China. What has been an established trend over the past few years has been given new urgency as a result of the virus. Shifting production lines between countries is no small task; such transitions are always essentially permanent in all but the longest of time frames.

Closing The Pantry

The Wuhan Coronavirus presents another potential threat to China's agribusinesses: the quarantines are resulting in animal deaths on China's farms due to lack of food and forage. There are reports on social media of some 30,000 ducks perishing for lack of food.
Given that China is already grappling with the loss of more than half of its swine herd to African Swine Fever ("pig Ebola"), losses among another source of protein could have pronounced consequences for Chinese food prices. Food price inflation had already surged upwards as result of ASF; losses among poultry producers will only exacerbate that situation.

The Global Supply Chain Is Closed Until China Reopens

The closing of China, especially if the closure stretches much past February 10, takes on global ramifications very quickly. As financial analyst Mike Shedlock quipped on his blog, "if you can't buy parts, you can't build cars." Companies whose products are made--in whole or in part--in China could be facing significant parts shortages if the disease keeps Chinese plants idled for much past the February 10 re-open date.
Major disruptions include Ford, Apple, Tesla, Qualcomm, Hyundai, Wynn resorts, Sony, BP, Pandora, Royal Caribbean, GM, Toyota, Nike, all the airlines, and many drug makers 
If it's "Made in China" there will be an economic hit.
In the short term, there are no alternative sources to alleviate parts and product shortages--the sting of which is the financial pain motivating global companies to move supply chain operations out of China--too many companies are recognizing they have too many eggs in the Chinese basket. Apple is dependent on Foxconn for shipments of its flagship iPhone product, and the decision by Foxconn not to resume full operations until late February at the earliest jeopardizes Apple's ability to sell iPhones. That Guangdong was recently placed under quarantine makes iPhone shortages increasingly likely, as that is where the majority of iPhone production occurs.
The big concern Yew said, is that if the smartphone manufacturing hub in Guangdong is shut down for an extended period, it would then start disrupting Apple iPhone shipments, possibly creating shortages of iPhones.
In addition to Apple, Korean car manufacturers Hyundai and Kia have already shuttered production lines in anticipation of parts shortages from China.

If you can't buy parts, you can't build cars.

Moreover, these impacts to the global supply chain are the hits that have already occurred, and whose impact will be felt in the coming weeks and months.  Regardless of what happens with the disease tomorrow, or the next day, these disruptions are already slated to occur, to an as yet indeterminate degree of severity. Regardless of what happens with the disease tomorrow, or the next day, these are the disruptions that will be felt outside of China.

(Update: Foxconn has received official clearance to reopen its iPhone factory in Zhengzhou. This factory accounts for approximately half of Foxconn's iPhone production.)

China Closure Means Hit To Australian Tourism

Besides China herself, the country with the biggest exposure to the economic shocks from the Wuhan Coronavirus is Australia, and in particular Australian tourism. China is one of the major sources of tourism revenue for Australia, and the quarantines as well as the suspension of air travel to and from China has dried up nearly all of that revenue for an as yet undetermined period of time.
The threat from the Chinese lockdown to tourism alone is very significant, Joiner says. China provides around 15-16% of visitors to Australia but they are the biggest contributors to the Australian bottom line when they are here, outspending American tourists by a ratio of three to one. Their spending of $12-16bn is greater than American, British, Japanese and New Zealand tourists put together.
As with the threat to Apple's iPhone inventories, this is a hit that has already happened, and will reverberate for some time yet. Some impact is already assured, and the longer the disease goes on, the greater the impact will be. 

While other sectors, such as mineral exports, will also suffer in the short term from China factory closures, they at least have the capacity to recover somewhat with increased shipments in subsequent quarters as factories reopen and production lines resume. Tourism  and similar service sectors of the economy cannot so easily recover lost revenues. Lost tourism revenue this quarter is unlikely to be made up in subsequent quarters, or ever.

China Closure Prompting "Worst Case" Pricing By Financial Markets

The question marks surrounding when China's economy will return to full operation have already been felt by world financial markets.  The Dow Jones Industrial Average has in recent days shed over 200 points in relation to coronavirus fears--an impulse reaction unmoderated by reliable facts which can provide reassurance. 

However, the "sell" impulse--typical in the face of uncertainty--must be acknowledged to have at least this much rationale: markets would rather price in the worst case now, to profit from any improvement over that case later. Essentially, they are pricing in a presumption the disruptions will be larger than can be assessed currently, and that plants will remain idle considerably past February 10. 
“As the impact continues to rise, officials around the globe are amping up precautions to stem the contagion to their own respective regions,” Lindsey Piegza, chief economist at Stifel Nicolaus, said in a note. 
Perhaps the greatest reason to doubt China's official outbreak statistics lies in the severe skepticism being expressed by the markets, which are not at all persuaded that business will return to normal in the very near future. If the markets think Beijing might be lying about the disease, or at least is being overly optimistic about it, perhaps the rest of us should be skeptical as well.

China Closure Means There WILL be Contagion

The blunt economic reality is that some contagion is already assured. What happens in China reverberates around the world. This was demonstrated quite plainly last summer, when a precipitous drop in the yuan triggered an almost synchronous drop in the euro.

The Wuhan Coronavirus has taken the lives of some 700 people (and counting). It will take the jobs of some number of thousands more, and not just in China. Australia and South Korea have already been impacted, and the United States will not be far behind, nor will the rest of the world.

Nor can the impact be easily dismissed as mild or easily absorbed. Returning to Michael Every's analysis of China's economic situation, it must be noted that this economic shock is radically different from the 2008 financial crisis.
During The Great Recession did *everybody* stay at home and almost all business shut down? I don’t recall that being the case. If this virus *is* all over in days then one can make the case that Q2, Q3, and Q4 will see a huge bounce in GDP into double digits as everyone restarts work and eats out more, etc. Yet if this drags on through Q1 and into Q2--and I have not seen any serious virologists, merely not-at-all-serious economists, suggest such a rapid return to normal is possible--then the negative effects in the first third of the year are going to be so bad that the rest of the year is never realistically going to get us back close to 6% y/y GDP growth again, or 5.2%, regardless of empty new skyscrapers and shiny subways and high-speed trains. Surely the whole year will be flat at best? Obviously, 2021 GDP will then be gangbusters in Q1 and Q2 (“so buy stocks!”) - but there will also be lasting damage if this drags on as SMEs shut down and don’t reopen, and as already capital-constrained banks are forced to bail everyone out, and as the PBOC is then forced to bail banks out. Market calm that does not make for.  
The Wuhan Coronavirus will have consequences for the world economy. We can assess the broad shape of those consequences, but we cannot assess yet the severity of those consequences--they might be mild, or they could be catastrophic (if all of China turns into an extended scene from "28 Days Later" it is safe to assume the impact to the rest of the world will be...not good).

We are denied that assessment because we do not have any clear indicator as to what the future holds for this disease--an information deficiency that is due in no small part to the dereliction of the legacy media, which as remained two steps behind the disease throughout this epidemic.

We do not know how bad Wuhan Coronavirus will get. We do not know how bad the economic fallout will be. Yet as we know the disease is already bad, we also know the economic fallout is already bad. We also know that as the disease continues, the economic fallout will only get worse. 

The virus which is claiming lives now will claim jobs later. The only real question is how much of each will it take?

9 February 2020: Updated to include force majeure cancellation of copper orders.
10 February 2020: Updated to include Foxconn reopening Zhengzhou plant.

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