Coronavirus in the Global Economy 

On Thursday, 30th January 2020, the World Health Organisation (WHO) Chief, Dr Tedros Adhanom Ghebreyesus, declared the novel-Coronavirus outbreak to be a Public Health Emergency of National Concern. The outbreak of this new virus in China (Wuhan City) has had ripple effects on an international scale, not only in terms of the contagion spread but also its effect on the global economy. 

The first case of n-Coronavirus was recorded on 31st December 2019. Having been almost 2 months since then, matters only seem to escalate on the outbreak front, while markets struggle to stabilise. If the world economy was a well-oiled car, China – being a major supplier and market (buyer) for so many firms and countries – would be one of the tyres. With the tyre being close to deflated, the car is in urgent need of  repair. 

Some of the markets and economies that were significantly affected include the Hong Kong Tourist Industry, Airline Industry, Oil Markets, Asian Stock Markets, Foreign Exchange Market and countless Multinational Corporations. 

Market Mania: As expected in a situation like this, stock markets across the world took hits. Share Prices in Hong Kong Stock Exchange, HKEX, were on a downward trend according to the Hang Sang Index. The market turned green after 3 days of drowning in reds on the 2nd of February, offering relief to investors. However, the same cannot be said about the Shanghai Composite Index (SSE) that plummeted down by -7.7% on 2nd February 2020. MSCI AC Asia Pacific Index captures the falling Asian markets as “it declined to its lowest level in 2 months” according to Cecile Vannucci at Bloomberg. The market was bearish, partly due to the Chinese stock markets being closed on account of the Lunar New Year holiday. However, part of the credit also goes to the virus that has been finding new homes. 

Many companies in Hong Kong and other Asian countries have sizable markets in China. With the fall in consumer spending, investors predicted profits to take a hit, leading to a fall in share prices. To top it off, distrust in the Chinese Authorities brewed more panic and uncertainty. Unlike the perturbed Asian markets, their European counterparts take a breath of relief as they stabilised early. 

Meanwhile, in the currency markets, values of the US dollar and Yen had appreciated as they became safe havens in a stormy period. Oil Prices crippled as shrinking demand from China, a major buyer, exerted downward pressure on the market. Crude oil prices have consistently been dropping according to the WTI Crude index. While this fall in prices benefits many players from across the globe, the Natural Gas and Petroleum industry cannot wait for China to get back up on its feet. 

The Corporate Game: The effect of the virus on the corporates has 2 aspects – demand side and supply side. The demand side effects have been adversely affecting exporters and MNCs. In 2018, the value of foreign direct investment and balance of payments net inflows in China was 203,492 million US$ (World Bank database). Over time, China has become a key player in international trade and for multinational corporations. Because of the outbreak, there was a sudden change in the spending habits of Chinese consumers. The fall in consumption has affected the multiple MNCs that found a home in China. Starbucks, for instance, is temporarily closing more than half its stores in the country. It is expected that this move will reflect poorly on its second-quarter and final year earnings.

Supply-side effects are more likely to last longer. When China became the investment and manufacturing hub for corporations across the globe, it became an integral link in the global supply chain. Thousands of warehouses, manufacturing units, retail units, headquarters and offices of international brands are located in China. Out of concern of employee health and welfare, companies such as Oppo, ZTE, Apple, Ford Motor & Co., Kraft Heinz and many more have officially reduced employee travels to and from China, with some companies even imposing complete bans on employee travel. Such decisions adversely affect internal management and hamper the smooth functioning of a company. 

This travel ban has led to huge supply chain disruptions, the effects of which will be seen in the quarterly reports. These disruptions might lead to a rise in the prices of many products produced or assembled in China. One of the industries stuck in the limbo of supply disruptions is the Smartphone industry. Smartphone manufacturers like Nokia, Apple, and Vivo are worried that handsets manufactured in China may be carriers of the virus and that selling them, potentially puts the health of workers and even consumers at risk. While it has been informed that such a situation is unlikely, companies are still apprehensive about how to proceed with the incoming stock. This is just one example from the many industries that are disturbed and sweating over supply issues.

Furthermore, the company-imposed travel ban is hurting the Airline Industry. Demand was already falling as tourists and individuals feared contamination. Thus, the reduced employee travels just became the cherry on the cake. British Airlines and Lions Air (Indonesia) have brought flights to China to a complete halt while other airlines like Delta Airlines have suspended certain flights temporarily. The effect of this travel restriction to and from China is not only inflicting pain on the Airlines, but also the tourist industry of neighbouring countries. Chinese tourists are a source of revenue for hotels, resorts, travel agencies and tourist destinations in countries like Hong Kong and Thailand. 75.1% of all tourists in Hong Kong come from Mainland China. According to 2019 Visitors Arrival data (year-to-date), in 2019 (Dec), the number of tourists from Mainland China in Hong Kong was 2,398,232. Travel ban will have an adverse effect on Hong Kong and other countries. The tourist industries will suffer as Chinese tourists become homebound. 

Verdict: While the problem of increasing contagions does not seem to be abating anytime soon, it is safe to believe that this is just the beginning of the storm that is hitting the global economy. The gigantic costs are to be borne by companies because of the outbreak, due to transportation issues, manufacturing halts, inventory issues. These effects are as unconfined to one firm, industry or country as perhaps the virus itself. Hopefully, China gets better soon. 

 

Works Cited

Vannucci, Cecile. “Here’s What You Need to Know as Asia Stocks Decline Today” Bloomberg, https://www.bloomberg.com/news/articles/2020-02-03/here-s-what-you-need-to-know-as-asia-stocks-decline-today?srnd=premium-asia. Accessed 3 February 2020.

“Country Profile” World Bank, https://databank.worldbank.org/views/reports/reportwidget.aspx?Report_Name=CountryProfile&Id=b450fd57&tbar=y&dd=y&inf=n&zm=n&country=CHNAccessed 3 February 2020. 

“Research and Statistics” PartnerNet Hong Kong Tourism Board, https://partnernet.hktb.com/en/research_statistics/index.html. Accessed 3 February 2020. 

“Is China the World’s Top Trader?”, ChinaPower, https://chinapower.csis.org/trade-partner/. Accessed 3 February 2020.

Advaita Singh is a first year student of Ashoka University pursuing her major in Economics.

 

 

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