How is the Novel Coronavirus Shaking the World?
2020 the world is witnessing deep structural shift, coupled with near-term concerns over the novel Coronavirus outbreak. As the death tolls of the coronavirus reach 2000, the spread of the virus and efforts to contain it are among the biggest threats since the disease hit export of the world’s second-largest economy and disrupts the global supply chain, especially the manufacturing sector. China is the world’s largest producer for electrical and electronic components. Moreover, The epicentre Wuhan was a booming factory for automobile components and accessories exports. As the virus has resulted in the temporary closure of the labour-intensive factories, the dearth of supply is being felt abroad.
According to Oxford Economics consultancy, the outbreak of the epidemic paints a bleak economic prospect for the world in 2020 as it could slow down its outlook for global growth growth to 2.3%, down from 2.5%. This number could be daunting as it would mark the weakest annual expansion since the global recession in 2009. Many economists draw a comparison between the outbreak of SARS, another coronavirus originated in China in 2002: with greater interconnectedness with the rest of the world and a four-times bigger size than that of 2002, the Coronavirus could leave a larger scar than SARS to the world economy.
Temporary Paralysis of the Chinese Economy?
The disease hits China at the worst possible timing - the Lunar New Year. Indisputably, the Chinese Lunar New Year carries significance; it marks the period of the world's largest intercontinental movement of population, historically exerting tremendous stress on its transportation system. Around 440 million passengers are expected to travel by rail this year, a year-on-year increase of 32.6 million, or 8%, according to estimates by the National Railway Administration of China. China’s aviation authority predicts that civil aviation passenger traffic is around 79 million. Just like families in the US splashing out on Thanksgiving, China’s spending habits increase around the Lunar New Year. Chinese national retail and catering revenues rose just 8.5% compared to 10.2% in 2018. However, this year, considering the spread of the disease, the periodical economic boom has to come to a halt. Worse still, the human-to-human transmission nature of the virus forced all the labour-intensive delayed re-opening dates.
As a result, the Shanghai Composite Index tumbled nearly 8% as the country’s markets reopened. This is another Black Monday for the Chinese investors after the 2015 China Market Crash. While shares in many sectors fell on, prices for some Chinese pharmaceutical companies hit their 10% upside limit. Shandong Lukang Pharmaceutical, Jiangsu Sihuan Bioengineering and Harbin Pharmaceutical Group Co. were among the limit-up companies.
In the past two weeks, the Chinese stock market literally underwent a roller coaster, thanks to the never-ending battle between the longs and the shorts. In fact, before the re-opening of the market, the central bank announced it was injecting 1.2 trillion yuan ($173 billion) liquidity into the markets. Such an approach is not uncommon in China. CCP always draws on massive reserves to staunch panic selling of shares and have deployed them during past crises, including the 2015 China Market Crash and the 2008 global financial meltdown and the 2002-2003 outbreak of SARS. As a form of Open Market Operation, the People’s Bank of China often uses reverse repurchases of securities that it plans to sell back, basically serving as very short-term loans, to increase the amount of money circulating in markets. It also has cut the interest rate on such “repos” to help ease credit.
Other Asian economies hit different degrees of recessions.
Other Asian economies are also heavily damaged by the spread of the diseases, namely Singapore, Japan and Thailand. Last week, most of the economists are predicting that Japan and Singapore are at the brink of recessions. This week the situation is very clear that they are in a recession.
Singapore, being a city-state and a flourishing financial hub, is more vulnerable to the outbreak of such an epidemic than any larger states. The Ministry of Trade and Industry of Singapore on Feb 17 downgraded its economic growth forecast to between -0.5 and 1.5% - indicating a possible recession - due to a weakened outlook after the outbreak of the coronavirus. The outward-oriented sectors such as manufacturing and wholesale trade will be affected by the weaker growth outlook in several of Singapore’s key final demand markets, including China. Companies in these sectors could also be affected by supply chain disruptions arising from prolonged factory closures and labour shortages in China. The domestic sectors including food and retail services would also be dampened as Singaporeans cut back on shopping and dining-out activities.
To cushion the economic fluctuation, the government postponed the rise consumption tax (GST) which is supposed to be implemented in 2021. International cruise and regional ferry terminals will receive a 15% property tax rebate, and the integrated resorts will receive a 10% property tax rebate. A $112 million Aviation Sector Assistance Package, co-funded by the Government, the Civil Aviation Authority of Singapore and the Changi Airport Group, will also provide relief to companies affected by the coronavirus outbreak.
Drawing a parallel to 2003, Singapore's economy shrank by 0.3% in the second quarter, amid the severe acute respiratory syndrome (Sars) outbreak. However, growth bounced back to record a 5.3% expansion in the third quarter, ending full-year 2003 with a positive 4.5% growth.
Officially declared in 17 Feb 2020, Japan economy, after a series of contractionary shocks created by the devastating Typhoon Hagibis, a wallet-shutting consumption tax increase and now the coronavirus, had shrunk at an annualized rate of 6.3% in the three months that ended in December, the worst contraction since mid-2014. The results predated the virus epidemic but were affected by a monthslong slump in Chinese demand for Japanese exports. One of the biggest contributors to the fall in export is definitely the halt of the lucrative flow of tourists from China coming into the country.
Why does the US market remain strong?
While the Asian markets are generally in turmoil thanks to the Coronavirus, the US market seems to be mildly affected and S&P and Nasdaq indexes continued to inch higher as the fear of the virus slowly eased. From the Mid January to Mid February, the S&P 500 index rises from 3320.79 (21 Jan 2020) to 3370.29 (18 Feb 2020), hitting all-time high. The strength of fundamentals of the US economy smoothened the ripples created by the Coronavirus.
The lowered interest rates can contribute to gains in stock prices. Last year, due to the urge of Trump’s government, the Fed took three consecutive cuts in the interest rate to prevent the US's economic downturn. Despite the intense debates regarding this decision, Trump could be right by accident. According to Lisa Sharlett, the Chief Investment Officer of Morgan Stanley, the lowered interest rate has helped support stock valuations, which are historically high based on price-earnings multiples. This, in turn, contributes to growth in household net worth, positive consumer confidence and more spending.
Taking a reverse angle, the cost of gasoline, heating oil and natural gas has fallen as fears of a global growth slowdown have led to lower energy demand. This is because the outbreak of the epidemic has halted the transportation network worldwide, with a plethora of intercontinental air routes temporarily cancelled. Those lower fuel prices mean more money in consumers’ pockets that they can spend on other things.
With all these factors combined, America, being far away from the epicentre of the Coronavirus, so far pretty much minimised the impact of such a “black swan” event .
How is the Coronavirus Going to Affect the Sino-US Trade Deal?
Also during this tumultuous period, the Sino- US Trade Deal reached its Phase I with the United States cutting tariffs on $120 billion of Chinese goods in half and China reciprocating on $75 billion of U.S. goods, including cars, crude oil, and soybeans. But even the U.S. National Security Advisor Robert O’Brien admitted that the coronavirus outbreak means China likely won’t be able to meet some of its limited commitments.
To further illustrate this, the United States was banking on China making $50 billion in additional oil and natural gas purchases this year and next year. However, with an array of factories in China coming to halt and massive cancellation of domestic and international flights, China’s demand for crude oil would be significantly reduced. Even before the outbreak of the Coronavirus, many economists perceive this deal to be unrealistic. With the outbreak of the epidemic, China has a good excuse not to fulfill its commitment.
From America's side, U.S. Secretary of Commerce Wilbur Ross even said that the deadly outbreak in China could be good for America. He said that it would lead businesses to reconsider their supply chains — and return jobs and manufacturing to the U.S. Many US companies run overseas factories in China. Many automakers like Fiat have been temporarily forced to shut down their plants in China due to the containment efforts to curb the outbreak. Apple’s biggest supplier Foxconn, has reportedly not yet fully resumed production at its factories in China as well.
In general, the world could expect a “decoupling” effect from both sides in this period as both sides show less commitment to the trade deal as compared to their domestic agendas.
Though the beginning of 2020 is not smooth, we can observe everything starting to stabilize. A strong US consumption sentiment pushes up the US stock indexes, providing an immediate boost to confidence for the investors worldwide. At the same time, with the implementation of timely open market operations and sustained support to the stock market, though chaos and panics remain, they are under control; the Shanghai Composite Index raised about 3000, which is above the price of 23 Jan when the market closed for Lunar New Year. Quoting Lisa Sharlett, “growth would be delayed, but not derailed”.