Coro­n­avirus fallout is chok­ing eco­nomic pipe­lines

Global growth ex­pected to shrink as business ac­tiv­ity, travel stall

The Washington Post - - FRONT PAGE - BY DAVID J. LYNCH

The eco­nomic ca­su­al­ties from China’s coro­n­avirus epi­demic are mount­ing as Asian and Euro­pean auto plants run short of parts, free-spend­ing Chi­nese tourists stay home and Amer­i­can com­pa­nies brace for un­pre­dictable tur­bu­lence.

That’s just the start of a fi­nan­cial hang­over that is ex­pected to linger for months even if the flu­like ill­ness is soon brought un­der con­trol, econ­o­mists and sup­ply chain ex­perts say. The Chi­nese epi­demic’s af­ter­ef­fects will prob­a­bly cause the global econ­omy to shrink this quar­ter for the first time since the depths of the 2009 fi­nan­cial cri­sis, ac­cord­ing to Cap­i­tal Eco­nom­ics in Lon­don.

Chi­nese fac­to­ries had been sched­uled to re­open Feb. 10, af­ter a Lu­nar New Year holiday that had been ex­tended for sev­eral days be­cause of the med­i­cal scare. But with many work­ers un­able or un­will­ing to re­turn to em­ploy­ers lo­cated in a sprawl­ing quar­an­tine re­gion, the re­sump­tion of rou­tine op­er­a­tions in many work­places has been de­layed.

Cater­pil­lar this week said most of its Chi­nese sup­pli­ers have re­turned to work. But Fox­conn, a ma­jor elec­tron­ics pro­ducer for Ap­ple, said it will be the end of the month be­fore even half of its fa­cil­i­ties are op­er­at­ing.

The coun­try’s links to the out­side world, mean­while, re­main frayed. United Air­lines and Amer­i­can Air­lines said this week that they would not re­sume nor­mal

ser­vice to main­land China un­til April 24, al­most a month later than planned.

The rip­ple ef­fects of China’s shut­down are spread­ing, with the auto in­dus­try es­pe­cially hard-hit. Nis­san tem­po­rar­ily closed one of its fac­to­ries in Ja­pan af­ter run­ning short of Chi­nese com­po­nents, one week af­ter Hyundai in South Korea did the same. Fiat Chrysler warned that it may shut­ter one of its Euro­pean plants. Some U.S. man­u­fac­tur­ers could face parts short­ages in one to two weeks.

“I worry that it’s going to be a big­ger deal than most econ­o­mists are treat­ing it as right now,” said Mo­hamed El-erian, chief eco­nomic ad­viser at Al­lianz, the Ger­man fi­nan­cial ser­vices com­pany. “It will take time to restart all these eco­nomic en­gines.”

About 5,100 cases of covid-19 were con­firmed in China on Thurs­day and 121 more people died, Chi­nese health of­fi­cials said Fri­day morn­ing. Most of the new cases and deaths con­tin­ued to be in Hubei prov­ince.

More than 63,000 con­firmed cases and ap­prox­i­mately 1,380 deaths have been re­ported in China since the out­break be­gan.

In the United States, the Cen­ters for Dis­ease Con­trol and Preven­tion on Thurs­day re­ported the 15th coro­n­avirus case, an in­di­vid­ual who had been in quar­an­tine in Texas since ar­riv­ing on a State De­part­ment-char­tered air­craft from Wuhan on Feb. 7. And Ja­pan re­ported its first coro­n­avirus death. It also said 44 more people had tested pos­i­tive for the ill­ness aboard the quar­an­tined cruise liner Di­a­mond Princess, bring­ing to 218 the num­ber of ship-borne in­fec­tions.

The coro­n­avirus struck China as many U.S. cor­po­ra­tions were re­con­sid­er­ing their global foot­prints. Pres­i­dent Trump’s tar­iffs on roughly 70 per­cent of all Chi­nese goods, im­posed dur­ing a two-year trade war with Bei­jing, raised doubts about the fu­ture of trans-pa­cific sup­ply lines.

“We were al­ready hit­ting the pause but­ton on glob­al­iza­tion,” El-erian said. “This [virus] dis­rupts the move­ment of goods and it dis­rupts the move­ment of people, mak­ing com­pa­nies re­assess how in­ter­na­tional they want their sup­ply chains to be.”

Af­ter ini­tially dis­miss­ing the epi­demic as prin­ci­pally a Chi­nese prob­lem, U.S. pol­i­cy­mak­ers in re­cent days ac­knowl­edged it will da­m­age the global and U.S. growth out­looks. Fed­eral Re­serve Board Chair Jerome H. Pow­ell said this week that there will “very likely be some ef­fects on the United States” from the epi­demic, which has closed thou­sands of Chi­nese fac­to­ries that sup­ply Amer­i­can com­pa­nies.

Among the first tan­gi­ble ef­fects in the United States is a de­cline in the num­ber of Chi­nese tourists. Vis­i­tors from China rep­re­sent a lu­cra­tive mar­ket for U.S. air­lines, ho­tels, lux­ury re­tail­ers and en­ter­tain­ment venues, with av­er­age spend­ing of about $6,500 per per­son.

As of Feb. 7, the num­ber of pas­sen­gers fly­ing be­tween North Amer­ica and China was 75 per­cent be­low last year’s level and was shrink­ing by the day, ac­cord­ing to Quandl, a fi­nan­cial data provider.

At Sino Amer­i­can Tours, a Man­hat­tan travel agency that caters to Chi­nese Amer­i­cans, book­ings have plunged by 20 to 30 per­cent, said Charles Man, vice pres­i­dent for mar­ket­ing.

“Of course, we’re im­pacted,” he said. “A lot of people can­celed trips back to Bei­jing, Hong Kong, Guangzhou, Tai­wan and Sin­ga­pore.”

Chi­nese of­fi­cials, mean­while, are grow­ing in­creas­ingly con­cerned that their ef­forts to con­tain the virus are stran­gling the econ­omy. Pres­i­dent Xi Jin­ping this week in­structed sub­or­di­nates to avoid “over­re­ac­tions” that in­ter­fered with China’s de­vel­op­ment goals. Huang Qi­fan, an in­flu­en­tial eco­nomic pol­i­cy­maker, has said the on­go­ing sup­ply chain dis­rup­tions are more costly than the two-year U. S .

China trade war, ac­cord­ing to Triv­ium, an eco­nomic re­search firm in Bei­jing.

In­deed, the bat­tle to con­tain the epi­demic brought much of the world’s sec­ond-largest econ­omy to a stand­still. The Chi­nese prov­inces most af­fected by the coro­n­avirus are home to 49,884 branches or sub­sidiaries of for­eign cor­po­ra­tions, in­clud­ing nearly 9,500 Amer­i­can op­er­a­tions, ac­cord­ing to Dun & Brad­street.

A Chi­nese quar­an­tine ap­ply­ing to roughly 60 mil­lion people — more than the pop­u­la­tion of Spain — in­ter­rupted rou­tine business op­er­a­tions for al­most ev­ery mem­ber of the For­tune 1000 list of the world’s big­gest cor­po­ra­tions, Dun & Brad­street said.

The Chi­nese gov­ern­ment’s en­forced halt to com­merce was akin to an eco­nomic stroke, cut­ting off the flow of needed parts and ma­te­ri­als to com­pa­nies all over the world. And just as with a stroke, the ef­fects will linger af­ter pro­duc­tion across China sput­ters to life.

“It’s going to hap­pen in phases,” said Hi­ten­dra Chaturvedi, a for­mer sup­ply chain spe­cial­ist for Mi­crosoft. “It’s going to take six to eight weeks be­fore ev­ery­thing comes back on line.”

Each ma­jor Chi­nese sup­plier to a global cor­po­ra­tion re­lies upon a net­work of smaller com­pa­nies to pro­vide food, uni­forms, san­i­ta­tion and parts. Nike, for ex­am­ple, de­pends upon 110 Chi­nese fac­to­ries, each with their own sup­plier webs.

“They’ll be hav­ing their own prob­lems,” said Chaturvedi, who teaches at Ari­zona State Univer­sity. “It’s not like you hit the but­ton and ev­ery­thing starts to work au­to­mat­i­cally.”

Along with crimp­ing pro­duc­tion of cur­rent prod­ucts, the coro­n­avirus shut­down has in­ter­rupted re­search and de­vel­op­ment ef­forts and thus may also de­lay the in­tro­duc­tion of nextgen­er­a­tion mod­els, he added. That could af­fect con­sumer elec­tron­ics mak­ers such as Ap­ple, which re­lies on China for al­most half of its 775 global sup­ply fa­cil­i­ties.

One of those firms, AT&S of Aus­tria, cut its rev­enue fore­cast for the cur­rent fis­cal year by nearly 7 per­cent af­ter the virus dis­rupted pro­duc­tion at its Shang­hai and Chongqing fa­cil­i­ties. The com­pany pro­duces printed cir­cuit boards for Ap­ple and In­tel as well as Euro­pean au­tomak­ers.

In some parts of China, busi­nesses must pass a lo­cal gov­ern­ment in­spec­tion be­fore re­sum­ing work. Since there are only so many in­spec­tors, that cre­ates a bot­tle­neck. Some for­eign ex­ec­u­tives are try­ing to speed things up by show­ing of­fi­cials re­ceipts prov­ing they are ma­jor tax­pay­ers, said James Mcgre­gor, chair­man of APCO World­wide’s greater China re­gion.

Many of­fice work­ers face long lines to have their tem­per­a­tures checked be­fore they can en­ter their build­ings. Once in­side, some have ob­jected to run­ning cen­tral heat­ing sys­tems, pre­fer­ring space heaters to the al­leged dan­gers of re­cir­cu­lated air, Mcgre­gor said.

ASE Tech­nol­ogy, a Tai­wanese semi­con­duc­tor maker, is strug­gling with a short­fall of re­turn­ing work­ers and un­cer­tain­ties about which of its sup­pli­ers are fully op­er­a­tional.

“This virus is a neg­a­tive lot­tery and ev­ery­one is do­ing what­ever they can­not to win,” Ken Hsiang, the com­pany’s head of in­vestor re­la­tions, said on a Feb. 7 con­fer­ence call. “So, the fear that is grip­ping the world, the over­abun­dance of cau­tion at a per­sonal, com­pany and sov­er­eign gov­ern­ment lev­els are com­pletely un­der­stand­able. The im­pacts to our business are to­tally un­pre­dictable.”

China’s $14 tril­lion econ­omy now is a patch­work af­fair. In some ar­eas, lo­cal of­fi­cials are prod­ding em­ploy­ers to re­turn to work. Else­where, of­fi­cials re­main pre­oc­cu­pied with the risk of con­ta­gion. The share of busi­nesses that are op­er­at­ing nor­mally ranges from about 26 per­cent in cen­tral Sichuan prov­ince to nearly 70 per­cent in Shang­hai, ac­cord­ing to Triv­ium.

Many em­ploy­ees re­main re­luc­tant to re­turn to jobs in crowded fac­to­ries, where an iso­lated cough might idle an as­sem­bly line. Those who want to re­turn of­ten face trans­port headaches as some pub­lic ser­vices have yet to re­turn to full op­er­a­tions.

“Ev­ery­thing was sup­posed to be back to nor­mal by now,” said Craig Allen, pres­i­dent of the U.S.- China Business Council. “It’s not going to hap­pen for a while. I think that’s start­ing to sink in.”

The coro­n­avirus is ex­pected to dent global growth by de­press­ing business and con­sumer con­fi­dence as well as tem­po­rar­ily sev­er­ing sup­ply chains, econ­o­mists said. “Where the trade war ended, the coro­n­avirus has picked up,” said Nathan Sheets, chief econ­o­mist for PGIM Fixed In­come. “It sug­gests a whole ad­di­tional class of risks they need to worry about as they rely on Chi­nese sup­pli­ers. It’s an­other pow­er­ful shock to­ward global de-in­te­gra­tion.”

Last­ing ef­fects on global trade also may emerge from the ocean freight mar­ket. Ship­ping rates on some routes out of China are down by one-quar­ter, de­spite new in­ter­na­tional reg­u­la­tions that took ef­fect Jan. 1 re­quir­ing the use of cleaner but more costly fuel, said Pa­trik Ber­glund, chief ex­ec­u­tive of Xeneta, an on­line ship­ping plat­form based in Oslo.

Ma­jor re­tail­ers and man­u­fac­tur­ers will soon be ne­go­ti­at­ing long-term ship­ping con­tracts amid an un­pre­dictable mar­ket. They might ben­e­fit in the short run from lower prices. But if ar­ti­fi­cially de­pressed rates are locked in for an en­tire year, one or more ship­ping lines could tum­ble into bank­ruptcy and fur­ther un­set­tle global trade, he said.

“If there’s limited cargo com­ing out of all of Asia, de­pend­ing upon how this de­vel­ops, we might see ship­ping lines re­ally strug­gling to pull through,” Ber­glund said.

Wall Street has taken the cri­sis in stride, with the Dow Jones in­dus­trial av­er­age still up about 3 per­cent so far this year. But the fi­nan­cial mar­kets’ calm could be tested as ad­di­tional data be­comes avail­able, said Gre­gory Daco, chief U.S. econ­o­mist for Ox­ford Eco­nom­ics.

Neg­a­tive read­ings on con­sumer or business con­fi­dence could send in­vestors flood­ing into U.S. gov­ern­ment bonds, push­ing up the value of the dollar and leading to tighter fi­nan­cial con­di­tions.

“We’ve been lucky to see no fi­nan­cial mar­ket ram­i­fi­ca­tions,” he said. “That’s where a big part of the risk lies.”

AGENCE FRANCE-PRESSE/GETTY IM­AGES

A res­i­dent wears a pro­tec­tive mask as she walks on an empty business street in Wuhan, China. Flights, trains and pub­lic trans­porta­tion have been closed for three weeks. Many work­ers are un­able or un­will­ing to re­turn to em­ploy­ers lo­cated in a sprawl­ing quar­an­tine re­gion, de­lay­ing the re­sump­tion of rou­tine op­er­a­tions in many work­places.

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