China in Distress – Disruption for the World Economy

10 Feb 2020

Global economy While Coronavirus dominates the headlines, economists are reporting on the other side of Coronavirus worry – the financial impact this will have not only on China, but the rest of the world.
 
The ‘financial flu’ has already created mammoth losses for China as export and import grinds to a halt, along with manufacturing, stores and businesses closing their doors to the public. China is the world’s 2nd largest economy. It constitutes 20% of global GDP and is now on quarantined lockdown. This will be hugely significant for China and the world. The true impact of which will become clearer over the next several weeks.

Markets
The Shanghai Stock market index was a sea of red as shares dropped 8% and more – overall, a whopping 400 billion dollars wiped off leading companies. That’s despite the Chinese Government injecting more than 170 billion dollars into the markets to try and ease investors concerns. It also spread to commodities which is hugely important in terms of gauging China’s economic health. Those included copper, steel and cotton – all down by 6-7%. A sharp indicator on how investors are thinking about the impact this will have in the future.

Oil
According to OilPrice.com reporting at the end of January – Coronavirus pushed China jet fuel sales down by 25% - with a severe impact on the travel industry, especially air travel. More recently, a Singapore gas trader told Reuters “Prices are free-falling just within this week. This kind of situation is unprecedented, this has never happened before.” Having nothing in the past to compare it to – means something changed this week and investors are beginning to realise - this isn’t going away any time soon. 

Global Manufacturing
Hyundai motor corporation – South Korea’s largest car maker, suspended all its assembly lines due to a lack of parts that are manufactured in China. Renault followed suit and halted all production in South Korea due to China’s supply disruptions. With China being so heavily involved in major UAE construction projects, it’s not surprising to see the Middle East putting up safeguards against China’s virus impact as some ships carrying Iron Ore into Chinese ports are still held up. This could likely lead to domestic competition stepping in equipped with guarantees of ‘follow through’ on project completion. In the China-Pakistan economic corridor, Coronavirus fears freeze Belt and Road projects as the Pakistani authorities shut down the projects - requiring testing for all the Chinese engineers. 

The FED
Whenever the FED admits to something it’s usually a ‘heads up.’ Bloomberg headlines read – ‘FED warns virus poses ‘new risk’ to global growth markets. The distress in China could spill over to U.S and global markets through a retrenchment of risk appetites, with declines in trade and commodity prices. According to The Telegraph – ‘Chinese financial shock gathers steam as the world holds its breath on Coronavirus.’ In an article written by Economist Ambrose Evans-Pritchard, he went on to suggest that “The Coronavirus is the Black Swan that might finally sink the markets” while using words such as ‘nasty numbers’ when describing Chinese stocks.