‘It’s not the black plague, but it’s not exactly good news either, is it?’ said a parent to me at my daughter’s basketball training last night.
What started off as a ‘bit of a bug’ has resulted in border shutdowns, scared universities, and an already wobbly tourist sector wondering if they’ll make a profit this year.
And that’s just today’s headlines.
Given how interconnected global economies are today, the broader impact is yet to be felt.
The markets seem to be having up and down days depending on the headlines.
Nonetheless, assessing the damage is becoming harder as the disease spreads.
For starters, comparisons are being made to the SARS virus back in 2002–3.
However, a lot can change in 18 years.
For starters, the world has accidentally come to rely on Chinese money.
Either by Chinese visitors worldwide…or the Beijing government printing money to keep the local economy afloat.
Locally, our universities and tourist businesses will take a hit to the bottom line.
Back in 2002, there were 50,000 Chinese students enrolled at our universities. Today that number is 260,000.1 Some 25% of university funding comes from international students.
New or returning students not allowed into Australia for their studies will see many universities lose money.
And if the bushfires hadn’t scared tourists off, there is likely to be a large reduction in the number of Chinese visitors in the next few months.
Some 10 million Chinese people visit Australia each year. Another 130 million Chinese tourists around the world in total.2
Capital Economics pointed out earlier in the week that tourists from China have increased tenfold since 2002.
When the SARS outbreak hit, global Chinese tourists dropped by roughly one-third. With Capital Economics adding that:
‘If they fell by a similar amount again, it would knock around 1.5 -2.0 percentage points from [gross domestic product] in the most vulnerable countries.’3
To compound all of this, we are making these assumptions based on the information we get.
Which, when it comes to the Chinese authorities, we should always remain sceptical.
Chinese newspaper the People’s Daily is running articles threatening those who share footage of how the Beijing government handles the coronavirus. Telling people that if they share any video of the pandemic they may face seven years in jail.4
That threat alone implies that the on ground experience may be worse than what we are seeing.
And this brings me to my conversation last night.
The coronavirus is not the black plague. We are not looking at a mass population wipe-out event.
Yet our economies are more intertwined then ever, and the full economic impact is yet to be understood.
And as Jim points out below, already the data for China isn’t looking good.
Read on for more.
| Until next time, |
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| Shae Russell, |
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Is the Virus Contained? Doesn’t Matter, It’s Too Late for China…
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We’re still in a period of uncertainty when it comes to the human and economic cost of the coronavirus pandemic and the extent of the pandemic itself.
As we write this, there are 17,318 reported cases. Of those, 362 deaths have resulted and 487 people have recovered.
The remaining 16,469 cases are in various stages of treatment with uncertain outcomes.
Still, the 2% fatality exhibited so far is comparable to the Spanish Flu pandemic of 1919–1920, which ultimately killed an estimated 50 million victims.
Almost 99% of the reported cases are in China, with 62.5% of those Chinese cases in the vicinity of Wuhan, a major city of over 11 million people.
But, the disease has spread (mostly through air travel from China or contact with Chinese travellers).
There are 20 cases in Japan, 19 cases in Thailand, and 18 cases in Singapore. The US has eight reported cases as of 2 February.
It often takes laboratories six months or more to discover an effective cure or treatment for a virus of this type.
In the meantime, quarantine is the most effective approach.
But, how do you quarantine a city of 11 million, let alone a country of 1.3 billion people?
Many countries have banned arrivals from China and leading airlines have discontinued flights to China.
That helps, but the virus continues to spread…
Beijing feeling the pinch
While the long-term medical outcome is uncertain, the short-term economic damage is not.
As described in an article by Reuters on Sunday, China’s economy is suffering extreme damage:
‘Beijing is facing mounting isolation as countries introduce travel restrictions, airlines suspend flights and governments evacuate their citizens, risking worsening a slowdown in the world’s second-largest economy.
‘China’s central bank said it would inject a hefty 1.2 trillion yuan [AU$259 billion] worth of liquidity into the markets via reverse repo operations on Monday as the country prepares to reopen its stock markets after an extended Lunar New Year holiday.
‘The government also said it would help firms that produce vital goods resume work as soon as possible, state broadcaster CCTV reported, citing a meeting chaired by Chinese Premier Li Keqiang.’5
Their consumer economy has stalled as people stay home and avoid public transport, stores, and restaurants.
Stocks crashed for a few days, and then stock markets were closed.
Upon reopening on 3 February, Chinese stocks promptly fell over 8% in a matter of minutes.
Tourism is dead and many businesses are requiring that executives cancel trips to China until further notice.
This comes at a time when the Chinese economy was slowing anyway.
Stimulus measures in the form of monetary ease are being tried, but are unlikely to work because of China’s sky-high debt levels.
Let’s hope the coronavirus is contained soon.
Unfortunately, the damage to China’s economy is already happening and will persist even if the virus is soon under control.
| All the best, |
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| Jim Rickards, PS: Discover how some investors are preserving their wealth and even making a profit, as the economy tanks. Download your FREE report by clicking here. |
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