From In 2002, when a lethal virus known as SARS emerged in China, the factories in the country mainly produced low-cost products such as shirts and sneakers for customers around the world.
Seventeen years later, another deadly virus is spreading rapidly in the most populous country in the world. International companies that rely on Chinese factories to make their products and rely on Chinese consumers for sales are already facing very serious problems.
Apple, Starbucks and Ikea have temporarily closed stores in China. Shopping centers are deserted, and factories making cars for General Motors and Toyota are delaying production as they wait for workers to return from the Lunar New Year holidays, which has been extended by the government to stop the virus from spreading. International airlines, including American, Delta, United, Lufthansa and British Airways, have canceled flights to China.
China’s economic growth is expected to slide to 5.6 percent this year, down from 6.1% last year, according to a conservative forecast by Oxford Economics which so far relies on the impact of the virus. This decline would reduce global economic growth for the year by 0.2 percent, to an annual rate of 2.3 percent – the slowest pace of the latest global financial crisis.
Returning from holidays, Chinese investors saw their equity sales in China drop by around 8% on Monday. Stock markets around the world plummeted in the following days as a public health crisis is warned it could turn into an economic shock.
Chinese leaders outlined plans to inject new credit into the economy on Sunday. This will include $ 22 billion net to support money markets and looser lending conditions for Chinese companies.
In addition to producing an astonishing range of low-value products such as clothing and plastic items, Chinese factories have long gained dominance in more advanced and profitable businesses such as smartphones, computers and auto parts. The country has evolved into an essential part of the global supply chain, producing necessary components from factories around the world, from Mexico to Malaysia.
China has also grown into a huge consumer market, around 1.4 billion people with an increasing appetite for electronic gadgets, fashion clothing and travel to Disneyland.
The trade war waged by the Trump administration caused the factories of the multinationals that produced in China to move to other countries, particularly Vietnam, to avoid American tariffs. Coronavirus could accelerate this trend, at least for a time, if global companies were to find themselves stuck outside of China.
The outbreak of the virus in Wuhan, a city with 11 million inhabitants, prompted the Chinese government to quarantine the metropolis and most of the province of Hubei, preventing people from moving. The government extended the lunar New Year holidays until Sunday, but the fear of the virus is so widespread and intense that many workers are likely to stay away from industrial cities this week. Important industrial areas – including Shanghai, Suzhou and Guangdong province – have extended the holidays by at least another week, preventing workers from returning.
A frightening epidemic that coincides with a big party will almost certainly result in a substantial loss of sales for China’s tourism and hospitality industries. Concerts and sporting events have been canceled. IMAX, the large Toronto-based film company, has postponed the release of five films that it intended to present in China over the holidays.
There have been nine confirmed cases in the United States, but no deaths. Anxiety is intense in airports. The 195 Americans evacuated from Wuhan and brought back to California were quarantined while a person was trying to escape. President Trump has temporarily suspended entry to the United States for all foreign nationals who have traveled to China. Delta, United and American Airlines are suspending service from the United States and China.
General Motors last year sold more cars in China than in the United States. Its Chinese factories will remain closed for at least another week at the request of the government. Ford Motor has advised Chinese executives to work from home while its factories remain dormant.
If customers cannot buy what they need from China, Chinese factories could reduce orders for imported machinery, components and raw materials: computer chips from Taiwan and South Korea, copper from Chile and Canada, factory equipment from Germany and Italy. This could potentially disrupt the global supply chain, “said an economist from DBRS Morningstar, a global credit rating company.
China today accounts for about a third of global economic growth, a larger share of global growth than the United States, Europe and Japan combined. The American semiconductor industry is particularly rooted in China, which is both an important production center and a market for its products. Intel in China generates approximately $ 20 billion in revenue, while Qualcomm depends even more, making 47 percent of its annual revenue – or nearly $ 12 billion – from sales in the country.
No one knows how long the coronavirus epidemic will last, how far it will spread it is therefore impossible to calculate how far the Chinese economy will stop, but the impact of the current epidemic will probably exceed that of SARS, given the stature of China in the world economy.
“The chain effects for the global economy will be much greater than they were,” said Nicholas R. Lardy, a Chinese expert at the Peterson Institute for International Economics in Washington.
But the effects of the virus on supply chains, which are notoriously complex, are difficult to predict. A single part of an advanced product such as a smart TV can consist of dozens of smaller components, each of which assembled from other pieces. The companies themselves often do not know which suppliers are three and four steps down the chain.
Apple assembles most of its products in China. The company has significantly reduced travel to China for its employees. Those uncertainties worsened on Saturday. Apple has closed its 42 stores in the country, while Walmart has cut hours in its stores.
At the international toy fair in Nuremberg, Germany, many Chinese suppliers, the world’s largest toy manufacturers, expressed confidence that their factories would soon reopen.
After SARS, China suffered a strong economic contraction and then rebounded. It could happen again. The only certainty is this: whatever happens in China will be widely felt in other countries. China has become a dominant player in the world economy. It is much more involved in the global supply chain and in the past decade, has been the source of the last resort for the global economy.