In my previous take, I wrote about the global economy and the possibility of a recession in the context of China and the US. In order to better understand the following piece I recommend you to look first into that analysis if you are not aware of the current difficulties of the Global Economy:

I think that there is no need to introduce in detail the topic I am going to cover in this article which is the most talked theme of the last couple of weeks. Of course, it is about coronavirus and its possible implications on the global economy as well as future investments. Although it is too early to be certain to what extent it will affect economic activities, we can at least assess what parts of the world are currently the most exposed. As you know, I don't like to speculate, which is why I gathered some relevant data to make some judgment about the possible impact.

At the beginning let's have a look at the current amount of reported cases, deaths and recoveries.


As the time of writing, Feb 4, 2020 (Now updated as of 6 Feb), the total number of confirmed virus cases has reached 27,797. There have been 563 deaths and 1128 recoveries. Most of them in Hubei Province where Wuhan is located (the epicenter of the epidemic with 11 million residents). Wuhan is also one of the largest of China's manufacturing centers. According to Global Macro Monitor, more than 300 of the World Top 500 companies have a presence in the city, including conglomerates such as Microsoft, Siemens, Honda, Renault or General Motors.

When we take a look at the data on a macro level, we can even better see the relevance of China in the global economy. To give you a better reference, I reproduced the table initially prepared by BCA Research adding some more data.

The table shows the importance of the Chinese economy during the times of the SARS epidemic in 2003 and now. At first glance, it is easy to notice that nowadays the Middle Kingdom economy is much bigger, with more commodities consumption as well as higher global share of different items sales. Also, the significance of the stock market is much larger than 16 years before. The most concerning, however, is the scale of the current outbreak where we've had many more deaths and confirmed cases in less than two months in comparison to eight months lasting SARS epidemic in 2003. Let's hope that the outbreak will be contained very quickly.

Thus, keeping that table in mind the following paragraphs will try to answer the question of how bad the situation is and will likely be in the future in terms of the Chinese and the global economy.

Chinese economic activities have been almost entirely frozen

The Chinese New Year of 2020 fell this time on January 25th and due to that the Lunar New Year holiday was initially set from January 24 to January 30. However, the sudden coronavirus outbreak has forced the Chinese government to initially extend the holiday until Monday, February 3. Unfortunately, the virus has been spreading so fast that at least 24 provinces, regions, and municipalities in China have advised companies not to resume work before February 10 at the earliest. In 2019, those areas accounted for more than 80% of the Middle Kingdom GDP, and 90% of exports, which has been calculated by CNBC analysts.

source: CNBC

Therefore, we have at least 11 more days without economic activities in the second-largest economy in the world. It is also important to mention that in Hubei Province businesses will not reopen at least until February 14.

To give you some examples, Starbucks has closed half of its 4,300 stores across the country, and the rest of them can't get some menu products. McDonald's has shut hundreds of its restaurants. Stores of the brands such as H&M and Uniqlo also have been closed. Walmart has informed that some of its stores are experiencing lack of supplies. Pharmacies are out of the face masks. It is a real humanitarian crisis.

Apart from the retail sector, one of the most affected have been airlines companies. At least 33 airlines including Lufthansa, Air Canada or British Airways have completely suspended flights to China which significantly influenced the sector's share prices.

source: Financial Times

What the above chart shows us is that the Chinese and Hong Kong airline indexes lost more than 10% over the last days of January, while the world airline index as much as 5%.

As it was not enough, the recent forecast by Cui Dongshu, secretary-general of China Passenger Car Association says that China's car passenger sales are set to fall 25%-30% during the two first months of 2020, the biggest slump in history. It is worth to remind that China is currently the world's biggest car market. Furthermore, it is highly likely that full-year auto sales in 2020 will drop by 5%, the unprecedented third consecutive year of declines.

When we think about manufacturing and transport activities the first commodity which comes to mind is oil. It is not a surprise then, that the global demand for this raw material has also been substantially impacted. As Bloomberg reported, Chinese oil demand has declined by three million barrels a day or 20% of the world consumption, according to people with knowledge of the country's energy industry. This is one of the largest demand shocks since the Global Financial Crisis in 2008-2009. Of course, it has been reflected in crude oil prices.

source: TheMarketEar

WTI Crude oil (purple line, left axis) has fallen more than $10 in less than a month! That's a huge, more than 20% drop. It is also worth to add that copper, the Chinese economy's benchmark (orange, right axis) which in the Middle Kingdom accounts for more than 53% of global annual consumption has dropped for 13 days in a row, the longest down streak ever (data goes back to 1971). The green line on the chart shows the S&P 500 index which has been quite resilient falling only 3-4% and rebounding since then.

Talking about the stock market, the most affected have been of course Chinese indexes which returned to trading on February 3 after an extended holiday break since January 24. On the day, the Middle Kindom's market has lost $393 billion of its $7.5 trillion value with the main benchmark, Shanghai Composite falling by 8% (the worst day in almost five years). It was all despite limiting short selling for brokerage firms, about 90% of 4000 companies dropping the maximum 10% daily limit allowed by the country’s exchanges and China's central bank (People's Bank of China) MASSIVE money injections amounting to a 900bn yuan or roughly $130bn.

To give you a sort of perspective, the Fed has injected $400 bn in four months after the repo glitch. Imagine what would happen without these actions. However, we have to remember that this is China and these activities are not unusual. The Chinese authorities will probably conduct further actions to calm the market and we will likely not see that anymore that sharp drops.

When China Sneezes, The World Catches Cold

Usually, epidemics cause 2-3 months slowdown of economic activities. For now, this is only speculation but if the virus will not be contained until the end of the quarter the China's annual GDP growth may fall below 5%. Goldman Sachs analysts have looked into previous outbreaks such as SARS and concluded that the economy usually recovers in the second or third quarter after the beginning.

source: International Monetary Fund, Goldman Sachs

They looked at the impact of the previous epidemics adjusting for current economic conditions. Their expectations for Chinese annual GDP Growth is 5.5% this year, which should be taken with a grain of salt.

As we've seen in the previous paragraphs data such as retail sales or industrial production will be the ones who have to be followed the most over the next weeks. Before the outbreak, JP Morgan has seen Q1 2020 retail sales increase for China at a 7.9% level. This forecast has been cut to -1.9% after the virus has substantially spread.

UBS, the biggest Swiss bank is much less optimistic about the future, at least in terms of the first quarter this year. Its analysts expect the Chinese economy to decline by 1.50% in Q1 compared to the same period a year earlier. If that materializes, it will be the first contraction since 1976. As they expect a sharp economic slowdown in the Middle Kingdom it cannot be a surprise that they also slashed the global GDP growth to 0.7% in Q1.

source: Bloomberg, UBS

As you can see, it would be the lowest growth since the second quarter of 2009.

On the flip side, Bloomberg economists are seeing 4.5% GDP Growth for China in the first quarter, which would surely not affect the global economic growth to that extent such as UBS prediction. In terms of other countries around the globe, Bloomberg Economists say:

"The biggest knock-on effects would be felt by Hong Kong, followed by South Korea and Japan.. Germany and Japan might take a 0.2% hit to GDP, while the U.S. and U.K. would absorb a 0.1% blow."

I think, however, that these predictions will change in the following weeks amid more developments around the virus.

In the end, I would like to give you a visual perspective on how the Global Supply Chains are shaped in the context of the Chinese economy. In order to do that I attached a map prepared by Bloomberg, showing the share of global imports of manufactured products coming from China to different countries around the world. The darker the color, the more imports are coming from the Middle Kingdom to a particular state.

When we take to account all countries included on the map it turns out that the total number of world imports from China is 20%.


As of now, the outlook is not really promising. At this point, the question which arises is whether the coronavirus outbreak will accelerate the economic slowdown to such an extent that will trigger a global recession. This scenario cannot be completely excluded. Because of that, we can expect that the Central banks around the world will again try to bail out the economy. It has been already initiated on Monday by the People's Bank of China and followed on Tuesday via liquidity shots. The problem is that the massive money injections into the financial system will do nothing for the economy if people will stay in their homes for the next several weeks. It just won't magically create economic growth.

Remember that in these types of developments it is very important to protect your portfolio, especially if you are a long term investor. This environment may benefit short-term traders who exploit the volatility. However, if you are investing over the longer period I think that rationality and sober assessment of the situation based on facts would be the best approach in this particular case.

Stay Safe,


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