The COVID-19 pandemic that is raging is not just wuhan, it's not just China's, it's also global. So far, it has spread to 23 countries and regions outside of China, covering Asia, Europe, North America and Australia.
Since the World Health Organization designated the coronavirus outbreak as a "Public Health Emergency of International Concern" (PHEIC) on January 31, this has raised particular concerns about how the outbreak and whose characterization of it will affect the Chinese economy.
Figure | Empty Wuhan railway station. (Source: The New York Times)
Some countries and regions around the world have actively taken humanitarian assistance, but some have adopted a series of negative lockdown measures to prevent and control the spread of the epidemic. In order to prevent the spread of the virus, many countries and regions have adopted border blockade measures, such as evacuating overseas Chinese, reducing flights, and refusing entry of Chinese tourists. As of Feb. 2, 71 countries had imposed immigration control measures against Chinese citizens, according to the National Immigration Administration.
The impact of the novel coronavirus on the economy is already clear. On New Year's Day alone, rail traffic nationwide fell by about 42 percent compared to the same day last year. Civil aviation passenger traffic fell by about 42%, and overall traffic fell by about 29%.
Zhang Ming, a researcher at the World Institute of Economics and Politics of the Chinese Academy of Social Sciences and chief economist of Ping An Securities, commented in Caijing magazine that China's economic growth may fall to 5% or even lower due to the outbreak of the new coronavirus epidemic, which may force policymakers to introduce more stimulus measures. He estimates that the impact of the outbreak on China's economy may be much greater than SARS.
International financial services firm Morgan Stanley also said that China's pneumonia epidemic may hurt global economic growth in the short term, potentially reducing China's GDP growth rate by as much as 1 percentage point in the first quarter.
Morgan Stanley said that assuming the peak of the novel coronavirus outbreak occurs in February or March, the global economic growth rate is expected to cut by 0.15 to 0.3 percentage points in the first quarter. If the outbreak continues for 3 to 4 months, global economic growth in the second quarter could be further impacted by 0.2-0.4 percentage points.
The International Monetary Fund said it was too early to quantify the likely impact of the outbreak on China's economy.
What is the impact of <h1 class="pgc-h-arrow-right" > PHEIC? </h1>
This is the sixth TIME WHO has identified a PHEIC event since the outbreak of "swine flu" in the United States and Mexico in 2009. The most recent was an Ebola outbreak in the Democratic Republic of the Congo between 2018 and 2019.
With regard to international trade, WHO, in its "Interim Recommendations" published on 31 January, proposes that Parties that take additional sanitary measures that clearly interfere with international traffic (i.e. refusal of entry or exit of international travellers, baggage, cargo, containers, means of transport, goods, etc., or delays in entry or exit for more than 24 hours) are obliged to report to WHO within 48 hours of taking the relevant public health grounds and reasons. WHO will review these reasons and may ask countries to reconsider their measures. WHO must share information with other States Parties on the measures and reasons received.
PwC China's analysis of the impact of PHEIC and its response to the PHEIC believes that the measures that must be reported to WHO in a timely manner by Parties that refuse the entry or exit of persons and goods or delay the entry and exit of the country for more than 24 hours are more conducive to protecting the legitimate rights and interests of Chinese export enterprises. In fact, from the past practice, very few countries have taken extreme measures to "ban entry" imports because of the epidemic.
However, the "provisional proposal" may still have a guiding effect on international public opinion and public psychology, and may lead to various contract disputes at the enterprise level. These disputes include the possible rejection of export goods and the possible revocation of export orders.
Will PHEIC cause China's exports to be rejected? According to PwC China's analysis, the possibility of importing countries banning chinese goods from entering china because of PHEIC currently seems unlikely, but it is not excluded that some overseas customers refuse to accept goods because of the epidemic. In this case, whether the reason for the customer's refusal is established depends on the terms of the contract and, in the case of unclear agreement, whether there are relevant provisions on the applicable law agreed upon by the parties to the transaction. Well, this falls within the category of contractual disputes, and the characterization of PHEIC is irrelevant.
Will PHEIC cause the export order to be cancelled? PwC China believes that delaying the resumption of work after the holiday due to the domestic epidemic may lead to delays in the delivery of international trade orders, in which case the overseas customer may claim to cancel the order due to the delay in performance by the Chinese enterprise, and the Chinese enterprise will bear the corresponding loss. Whether Chinese enterprises can avoid related losses depends on whether the domestic epidemic constitutes a "force majeure" that causes contracts. In this regard, WHO's decision on PHEIC may justify Chinese companies' claims of "force majeure".
As for the economic impact of PHEIC, PwC China believes that given that who's "interim recommendation" is not mandatory and only has a 3-month deadline, the impact of WHO's decision is not as severe as many people think.
Aon Pan, a partner at Xinbai Law Firm, a member of PwC's global network, told DeepTech that the World Health Organization's determination that PHEIC has occurred in a country with such a large economy in China is unprecedented, so it is not very clear what countries will react to and then have some restrictions on which industries.
In principle, Pan said, the World Health Organization does not recommend that countries adopt any restrictions on trade and travel. However, judging from the actual reactions of various countries, some of the restrictive measures they have taken seem to be beyond the scope of the World Health Organization's recommendations, such as restricting the entry of people. As for the trade in goods, although there are some online reports or circle of friends news, from the official information, most of the rumors have not been confirmed.
He believes that one of the more realistic difficulties now is that the international shipment of goods, which is mainly based on air transport, may be affected in the past 3 months. If the product is not based on air transport as the main means of transportation, and the layout of the entire supply chain is mainly to supply domestic customers, then it is not affected so much except in areas with serious epidemics.
<h1 class="pgc-h-arrow-right" > Wuhan's manufacturing industry bore the brunt </h1>
Whether or not WHO qualifies the outbreak with PHEIC, China's tourism, entertainment and retail sectors have been hit hard in the short term, and extended factory shutdowns in the country could drag down industrial production and trade.
Figure | Manufacturing industry distribution in Wuhan. The Little Red Circle is the wild game market where the virus originated. (Source: The British Post)
First and foremost is Wuhan, where the new crown epidemic is the hardest.
In the Fortune Global Rankings, about 230 of the Fortune Global 500 companies have invested in Wuhan. According to the analysis of Song Xuetao, chief macro analyst of Tianfeng Securities Research Institute, Wuhan is not only the central city in the central region, but also a key link in china's manufacturing industry chain, with large-scale industrial clusters in the fields of electronics, automobiles, medicine and other fields, once the production and logistics in Wuhan stop, some manufacturing enterprises outside Hubei may also face the problem of supply and suspension of production.
The most obvious impact of the epidemic may be automobile manufacturing. Wuhan has gathered five major vehicle companies: Dongfeng Passenger Vehicle, Dongfeng Honda, Dongfeng Automobile, Dongfeng Renault and SAIC-GM. OEMs have attracted a large number of parts companies, covering the chassis, gearbox, body, electronics, interior, glass and other major parts, if the continuous shutdown may have a certain impact on downstream vehicle production.
Song Xuetao believes that in the short term, although the impact of the epidemic on the manufacturing industry is transient, it will be amplified by the industrial chain: first, the direct impact of the suspension of production in Wuhan, second, the indirect impact of the suspension of production in Wuhan on the upstream and downstream enterprises of the industrial chain, and third, the impact of the delayed resumption of work in Henan, Chongqing, Hunan and Zhejiang, Guangdong and other provinces around Hubei is further amplified by the industrial chain.
The most affected of the joint ventures are French companies, especially car companies. According to the Yangtze River Daily, Wuhan is home to more than 100 French companies, and 40% of French investment in China is in Wuhan.
Credit Suisse said in an investor note that Wuhan automakers expect to produce 1.6 million vehicles this year, or 6 percent of China's total production. As an important center of the automotive industry, a number of multinational car companies, including PSA, have set up companies in Wuhan, and Peugeot Citroen joint venture DPCA has three factories in Wuhan. In addition to PSA, French faurecia, Valeo and other auto parts giants are also investing in Wuhan.
After the outbreak of pneumonia in Wuhan, Peugeot Citroen will withdraw 38 foreign employees and their families working in Wuhan, who will first be quarantined in Changsha, Hunan Province, and then return to France.
Honda Motor said it would resume production at its Wuhan plant on Feb. 14. Japanese employees and families of Honda and Nissan will return home on a chartered flight from the Japanese government.
Tesla will also be affected as far away as Shanghai. According to the Wall Street Journal, Tesla's chief financial officer, Zach Kirkhorn, said the spread of the virus could constrain Tesla's efforts to increase production in Shanghai and slightly dampen the first fiscal quarter. Tesla is currently betting heavily on the Chinese market.
<h1 class="pgc-h-arrow-right" > to affect technology manufacturing </h1>
The General Office of the State Council issued a notice on extending the Spring Festival holiday in 2020, requiring the extension of the Spring Festival holiday in 2020 to February 2 (Sunday of the first lunar month) and from February 3 (Monday) to work normally; colleges, secondary and secondary schools, and kindergartens in various places have postponed the opening of schools, and the specific time will be notified by the education department separately. The postponement of the Spring Festival holiday will impact the investment growth and export growth in February 2020. This will inevitably affect the growth rate of investment in manufacturing, real estate and infrastructure, as well as the growth rate of export industries.
Outside of Wuhan, Jiangsu and Guangdong' moves as technology manufacturing hubs vital to global supply chains have also attracted attention. These include iPhone assemblers Foxconn and Pegatron, Japanese component and machinery makers such as Murata and Japan Display, and South Korean electronics giants Samsung and LG.
Suzhou, for example, has postponed the resumption of work for millions of migrant workers. As one of the world's largest manufacturing hubs, companies such as Johnson & Johnson, Samsung Electronics and Foxconn all have factories here.
Foxconn's factories in China will also extend the Spring Festival holiday. Foxconn said in a statement that steps have been taken to ensure that all global manufacturing obligations continue to be met.
For the new situation that Foxconn encountered, Apple CEO Tim Tim Cook said iPhone makers are looking for alternative suppliers to make up for any expected lost production.
Based on recent public health and prevention considerations, Apple has decided to close all of its retail stores and offices in China from February 1 to February 9.
Consumer service companies such as Starbucks, McDonald's, KFC, H&M and Uniqlo have closed stores in China.
Zhang Ming analyzed that the year-on-year GDP growth rate in the four quarters of 2019 was 6.4%, 6.2%, 6.0% and 6.0%, respectively. In other words, GDP growth in the first quarter of 2020 could be around 5.0%, or even below 5.0%.
As of 3 February, there were 15 confirmed cases in Hong Kong. Hong Kong's Disneyland has closed, the Spring Festival celebrations have been cancelled, and local schools will continue to extend the holidays. Given the shadow of SARS, Hong Kong has banned visitors from China's Hubei province. The high-speed rail to and from the mainland was suspended and West Kowloon Station was closed. Cathay Pacific Limited suspended flights to and from Wuhan. This will affect Hong Kong's tourism and consumer services.
The spread of the novel coronavirus has also hit Macau's tourism industry. Macau has banned tourists from Hubei Province and banned tours from Chinese mainland. As the only city in China where gambling is legal, macau casino operators' share prices have plummeted.
<h1 class="pgc-h-arrow-right" > affected worldwide</h1>
China is the world's largest manufacturing intermediary, so how will the coronavirus affect the global economy?
Bloomberg estimates that 20% of global imports come from China. So the longer China is dragged down by the coronavirus, the more affected the industries of other countries will be. In particular, Asian countries such as Cambodia, Vietnam, South Korea and Japan have 40% of their consumer product chains coming from China.
On January 30, Google announced the temporary closure of all of its offices in Chinese mainland, Hong Kong and Taiwan. Its office in Chinese mainland focuses on ad sales and mobile developers, as well as partnerships. Google also imposes restrictions on business travel to Chinese mainland and Hong Kong, where employees and immediate family members from other parts of Google are required to work from home for at least 14 days if they return from China.
Honeywell, a U.S. high-tech company, said it had restricted travel to the Wuhan pneumonia-stricken area.
The pandemic will weigh on air travel demand. Boeing said the impact of the novel coronavirus on the recent increase in foot traffic is a factor to pay close attention to this year.
British Airways and Indonesia's Lion Air said they would suspend all flights to Chinese mainland, saying the move was in line with the Uk's Foreign Office's advice. Lufthansa and its subsidiaries Swiss Air and Austrian Airlines followed suit.
American Airlines Group said it would suspend flights from Los Angeles to Shanghai and Beijing due to a sharp drop in travel demand.
Royal Caribbean Cruises Ltd. warned that its FY2020 performance was damaged. The company canceled three cruise ship departures scheduled for February.
In Europe, Germany confirmed that 4 employees of The Bavarian automotive supplier Webasto SE were infected after an employee from China visited the company's headquarters.
Volkswagen has called on employees not to travel to China and urged about 3,500 employees working in Beijing to work from home for two weeks after the Spring Festival, and its Chinese subsidiary has suspended international and domestic business travel. Volkswagen is China's largest foreign automaker, producing about 4 million cars a year in China.
<h1 class="pgc-h-arrow-right" > SARS</h1>
How much has the outbreak affected the economy? It is necessary to review the impact of SARS.
According to Jong-Wha Lee, a professor of economics at Korea University and director of the Institute of Asian Studies, among others, SARS caused a global economic loss of $40 billion in 2003.
The International Air Transport Association (IATA) released estimates in May 2006 that the SARS pandemic caused a 0.1% reduction in global GDP.
However, while the outbreak of the virus will disrupt the overall economy and hit tourism-related developments such as hotels, airlines, luxury goods and consumer goods companies, it will also generally benefit pharmaceutical companies.
Even if the health impact of the pandemic is relatively limited, the economic consequences could quickly amplify. After the outbreak of the epidemic, people will restrict various social consumption activities, do not take public transportation, do not go to work, and do not go to shopping malls, restaurants, movie theaters, venues and other places.
According to Reuters, economist Victoria M. In a 2017 paper, Victoria Fan et al. estimated that given the inherent costs of reduced revenues and increased mortality, epidemics can cost about $500 billion a year, which is equivalent to 0.6 percent of global revenues.
A 2016 study by the Framework Committee on Global Future Health Risks concluded that 21st-century epidemics will cost the global economy more than $60 billion a year.
The stock market and the economy are affected by many factors at the same time, including economic data, the operating conditions of companies, and geopolitical changes, so it is difficult to determine the impact of a single factor on global stock markets and the global economy. Reuters article said that during the SARS outbreak, the IMPACT of the US invasion of Iraq on the market was no less than that of SARS.
However, the impact of the outbreak will not last long. After the SARS outbreak in 2003, the MSCI Global Index, while decoupling from global stock markets, caught up in just 6 months.
(Source: Reuters)
<h1 class="pgc-h-arrow-right" > there are business opportunities in crisis </h1>
The epidemic is fierce, how should China's industry respond?
Ren Zepingren, president of Evergrande Research Institute, wrote that the short-term impact of the epidemic on the macro economy is relatively large, mainly concentrated in the first quarter. The impact of the current pneumonia epidemic on China's economy mainly comes from within, caused by the shutdown of some domestic industries, and fundamentally depends on the domestic response.
PwC China put forward three suggestions for response measures from the government level: First, it should further strengthen the national mobilization efforts to effectively control the spread and development of the epidemic and minimize the impact of the epidemic. Second, appropriately expand government expenditure, further reduce the tax burden of small and medium-sized enterprises, and directly subsidize some enterprises that have been seriously affected by the epidemic but are closely related to the national economy and people's livelihood. Third, appropriately reduce the reserve requirement and benchmark interest rate, increase the release of liquidity, reduce financing costs, and help small and medium-sized enterprises tide over difficulties.
Pan Yi'an said that for enterprises, the first thing that needs to be done is to sort out the layout of their entire supply chain. Comb through which channels have been affected, such as which air routes need to be re-planned. If goods from China are affected by customs clearance in the importing country, companies can first understand from various sources what the specific problems they are encountering are. Then do a screening, whether it can be solved by legal means, or through the re-planning of the supply chain, through other operational means to solve.
There are also opportunities in crises. The pandemic has the potential to change a number of business models and start a business change. Xue Hongyan, assistant dean of Suning Institute of Finance, believes:
The first is unmanned delivery. In 2003, a large number of personnel isolation during the SARS epidemic allowed e-commerce to rise to the occasion, and greatly changed consumer living habits in the following decades, while indirectly driving the growth of third-party payment, modern logistics and even group buying, takeaway and other industries.
Today's takeaway and e-commerce is a mature business model, Xue Hongyan believes that isolation is expected to promote the reform of offline delivery model, that is, unmanned delivery brought by drones, unmanned vehicles, and robots.
As early as 2013, Amazon proposed a drone delivery plan, and three years later, the Prime Air delivery drone it developed delivered the first order. Today, emerging technologies such as artificial intelligence, the Internet of Things, and big data have laid the foundation for unmanned distribution.
The second is the innovation in the field of pan-entertainment. Taking the Spring Festival movie as an example, "囧Mom" took the lead in choosing the network to broadcast for free, which set a precedent for the reform of the distribution channels of the film industry.
Third, the community business and marketing model is expected to "advance", and the epidemic can help users develop consumption habits. Xue Hongyan believes that the outbreak of the new coronavirus provides new opportunities for the development of fresh e-commerce and community convenience stores.