Global stock market’s diagnosis on China coronavirus threatens the global economy

By Hazrat Hassan

Markets have tumbled as investors worry that Chinese shoppers will stay home for the Lunar New Year holiday and beyond. Economists say the possible impact isn’t yet clear.

The outbreak of a deadly disease in China has cast a pall over growth prospects for the world’s second largest economy, raising fears about the global outlook if the mysterious coronavirus spreads or worsens.

Financial markets across Asia fell on Thursday, led by sharp drop in stocks in China, as investors pondered the potential impact of the coronavirus. The extent of its severity has become clearer over the past two days, as Chinese officials reported a surge in cases and a jump in the number of deaths to at least 26. [1]

On Thursday, officials extended limits on movement in and out of Wuhan, the epicenter of the outbreak, to two nearby cities that millions more call home. The uncertainty has put a palpable damper on Chinese life just before the Lunar New Year holiday — typically a time of travel, shopping and gift-giving — which begins on Friday. Train stations and airports were subdued as travellers changed plans for the weeklong holiday, and seven of the most anticipated film openings of the holiday season were postponed .[2]

The Forbidden City in Beijing — China’s most popular tourist attraction — announced, without giving further information, that it would be closed starting on Saturday.

On the minds of many in China and around the world right now: Could this new virus cause the same kind of damage as the SARS epidemic, which killed 800 people in 2003?

The question is a crucial one beyond China, because the Chinese economy has for years been one of the world’s most powerful growth engines. A stumble in China could hobble jobs and growth elsewhere.

China’s growth in 2003 plunged briefly during the height of SARS but came roaring back in a time when global companies were building Chinese factories and exporting more and more goods abroad. [3]

Today, China’s economy is bigger but is growing at its slowest pace in nearly three decades. It is grappling with problems like the trade war with the United States and a campaign to wean local governments and companies off their addiction to borrowing.

It also depends more on consumers like Mo Chen, 29, who is curtailing her holiday travel plans, to stay on the safe side. In 2003, the worst-hit sectors were transportation, retail and restaurants.

Ms. Mo, who works for an internet company in Shanghai, had been looking forward to traveling home to see her family in Xiangyang, Hubei Province, nearly 200 miles from Wuhan. But given the outbreak, she and her brother, who lives in the city of Hangzhou, decided not to go home. It will be the first time that Ms. Mo has not spent Lunar New Year with her parents.[4]

She now plans to stock up on supplies and stay home, not even venturing out to meet friends or go to the movies. She also intends to skip a trip to the mall to buy new outfits, because nobody will be around to see her wear them. Her brother, meanwhile, is planning to buy pots and pans.

“He never cooks,” she said. “He always either eats out or eats at the company canteen. But last night our mom asked us to stock up on food, not go out and cook at home.” [5]

For now, the impact is not yet clear. The authorities seem to be responding faster to this outbreak than they did in 2003, but China’s censors are erasing anything that veers from the official narrative. The new coronavirus appears to be less deadly than SARS, but it is difficult to detect, and the authorities started limiting movement out of Wuhan only after many people had set out for their holiday travels.

Wuhan is essential to commerce in its region of China, though the economic impact there is expected to be muted by the advent of the holiday. The city is a major national transport hub and has become a center for auto manufacturing, with factories that build cars for General Motors, Honda and many others, as well as dozens of auto parts makers. [6]

But the effect on people across the country could be a more important factor.

Though global stock markets have a record of shaking off health scares, that didn’t happen with many publicly traded China businesses listed in the U.S. on Friday, when companies potentially hurt by the spread of coronavirus closed lower. Mainland exchanges were closed for the Chinese New Year, which is officially today. [7]

Big decliners included travel booking companies such as, formally known as Ctrip, the country’s largest online travel booking agency. Its shares fell 6.9% on Friday and have lost about 18% of their value in the past week. Trip-backed Tuniu fell 2.2% to $2.20.  Tuniu’s stock once-mighty stock traded above $20 in 2015.

Among Chinese airlines, government-controlled China Eastern fell 1.4% on Friday to its lowest since October. Hotel chain management firm Huazhu, led by billionaire Ji Qi, lost 18% of its value in the past week, including a 2.5% drop on Friday.  Retail-linked stocks were also under pressure. Starbucks coffee chain rival Luckin plunged by 8.6% on Friday. China e-commerce heavyweight Alibaba fell 5.7% last week, including a 2.5% swoon on Friday. And among multinationals with relatively large exposure to China’s consumers, Yum! China fell nearly 1% on Friday and Starbucks lost 1.8%. [8]



Hazrat Hassan, PhD in Corporate Finance, Business School, Sichuan University, Chengdu, China

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Foreign Policy News

Foreign Policy News is a self-financed initiative providing a venue and forum for political analysts and experts to disseminate analysis of major political and business-related events in the world, shed light on particulars of U.S. foreign policy from the perspective of foreign media and present alternative overview on current events affecting the international relations.

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