China accounts for 17% of global gross domestic product today, but this figure underestimates the nation’s importance in complex global supply networks. In 2018, China was the world’s biggest trading nation, accounting for 13% of global exports against 9% for the US.
China accounts for 17% of global gross domestic product today, but this figure underestimates the nation’s importance in complex global supply networks. In 2018, China was the world’s biggest trading nation, accounting for 13% of global exports against 9% for the US.

Lockdown in China is gumming up the works

  • The economic implications of coronavirus are multiplying, affecting key supply networks. It’s time to get worried
  • If Chinese factory closures continue in industrialized provinces after 10 February, companies that depend on imports from the country will feel the effects soon

BENGALURU : Jeff Fai, whose family owns a cashmere sweater factory in Guangdong, China, reports that by this time in the year, his buyers in the US, Canada and Australia would have set a timetable of business meetings with his Hong Kong-headquartered firm for the first quarter. But this year is different. As the panic about the pneumonia-like coronavirus persists, his buyers have not scheduled any meetings in the first quarter.

“I bet they don’t want us to visit them in March as usual," said Fai. At the company’s factory, meanwhile, it is uncertain how many of the 300-strong workforce will show up if the government allows units to reopen on 10 February.

In business decisions, both existential and sometimes inconsequential, the China question is looming larger than ever. Hong Kong is already reeling from the collateral damage from the coronavirus. On 4 February, the city of seven million, which in 2018 received a record 51 million visitors from China, announced it would impose a 14-day quarantine on visitors from the mainland. Its flagship airline Cathay Pacific has cut flights to mainland China by 90% and asked staff to take three weeks’ unpaid leave.

On 4 February, Credit Suisse cancelled its annual investment conference in Hong Kong next month. As many airlines across the world suspended flights to China—Delta Air Lines, United Airlines and British Airways among them—the economic implications of the epidemic were multiplying alongside the spread of the virus in China. The Asian nation is such an important market as well as a consumer and producer for so many industries that even trade fairs and conferences far from China are being affected. Swatch announced it was postponing its watch fair in Zurich.

No country in history has been as central to the world economy as China is today. Its economy may be second in size to the US, but China is now part of so many supply chains—from cars to iPhones—and its infrastructure companies lead such an array of port and road projects—from Africa to Central Asia—that it is hard to visualize a world economy in which the country is pushed to the sidelines.

In effect, with China in lockdown and its factories closed for an extended period to prevent the spread of the coronavirus, that’s exactly where the world finds itself in today.

Supply chain shutdown

A vivid demonstration of how supply networks and production lines could come to a shuddering halt was Hyundai Motor Co.’s announcement late on 4 February that it was closing all its vehicle factories in South Korea because of the unavailability of wire harnesses and other components from Chinese suppliers. Other global auto manufacturers may also be a couple of weeks away from similar shutdowns.

Apple Inc.’s plans to ramp up production of its iPhone 11 Pro model are almost certain to be affected. Oil prices fell below $50 a barrel, reflecting a 25% drop in demand from China, just weeks after the virus spread from its epicentre in Wuhan in the central province of Hubei.

Compounding matters are restrictions on travel to contain the spread of the virus, which has a much higher infection rate than the Severe Acute Respiratory Syndrome (SARS) or the common flu virus. The coronavirus incubates in humans for up to a fortnight without showing symptoms. The New York Times reported this week that three Germans contracted the disease from a Chinese business partner who had shown no symptoms of the infection.

Coming on the heels of the tough trade deal between the US and China, some feel this outbreak may even prompt a material shift in global supply chains. Ranjan Mahtani, chairman of Epic Group, the Hong Kong-headquartered supplier of casual cotton trousers to US retailers—with factories in Bangladesh, Vietnam and one under construction in Jharkhand—said the virus will hasten the relocation of apparel makers from China. “If this situation does not correct itself very fast in the next two weeks, it could have a disruptive effect on the entire supply chain and all brands’ sourcing. Nobody really has a handle on the ramifications as China is yet to resume activity after the New Year holidays. The blow will get magnified every day that (the shutdown) goes on," he said.

In the past few days, I spoke to a random sample of businessmen in India to try and understand whether they had linkages to China. Each one of them did, from a leather exporter in Kerala, who anticipated that getting supplies of mould machines would be difficult, to a large distributor of insecticides already experiencing supply shortages from China. The owner of a mid-sized resort at a hill station in Maharashtra said she had been informed by the furniture supplier in Guangdong that the shipment the hotel had been expecting in a few weeks is certain to be delayed.

Comparisons with SARS

This week also marked a grim milestone for the coronavirus, as it raced past the SARS virus in terms of the number of fatalities in China: by 5 February 560 people had died from the new virus in China and 28,000 officially deemed to be infected. By comparison, SARS killed 349 people in China after 5,327 cases were reported, according to the World Health Organization.

Looking back, SARS is useful as a historical parallel, but it is a poor guide of how much damage the current lockdown on China could mean for the world economy—and for countries such as India that are dependent for raw materials as well as consumer goods from the country. China’s integration with the world’s supply chains was in its infancy in 2003. That was just two years after its accession to the World Trade Organization.

China accounts for 17% of global gross domestic product (GDP) today, up from 4% in 2003, but this figure underestimates its importance in complex global supply networks. In 2018, China was the world’s biggest trading nation accounting for 13% of global exports against 9% for the US, even though its economy is second to the US.

Visiting the factories of Guangdong, China’s most export-oriented province, for the Financial Times (FT) between 2010 and 2013, I recalled asking Ramesh Tainwala, then a senior executive with Samsonite, why the company did not move more of its production out of China as labour costs were rising at double-digit levels in its factory towns. Tainwala replied that a Samsonite suitcase had a few hundred components and most were made in China. Labour costs were a much smaller part of the decision-making calculus for companies such as his.

India’s trade linkages with China are also profound. Indeed, the past four budgets under the Narendra Modi government have targeted tariffs of goods imported predominantly from China, most recently raising duties on solar panels, furniture and toys, turning back two decades of steady progress towards bringing India’s tariffs in line with those prevailing in Asia. India’s imports from China were about $70 billion in 2018-19.

Ironically, India’s pharmaceuticals industry is likely to be one of the first sectors to be hit by the shutdown of travel to China and the extension of forced factory closures in 12 provinces that account for the majority of its industrial production. China supplies more than two-thirds of the bulk drugs and raw materials that are imported to make medicines in India.

Interconnected world

A global pandemic usually refers to a major outbreak of a disease in two continents. Despite the spread of the coronavirus to countries such as Japan and Thailand, the world is not yet quite at that point. But what might be called a “panicdemic" was in evidence as airlines stopped flights to China. For instance, in Bali, some 5,000 tourists were stranded when Indonesian airlines were instructed by the government to stop flying to China this week.

This is another aspect of the coronavirus that makes its spread to countries visited by Chinese in large numbers potentially alarming, relative to 2003 when SARS struck. In 2018, as many as 163 million Chinese tourists travelled around the world; in 2003, just 20 million did.

The fact that this iteration of the coronavirus infects people via casual contact does make the imposition of quarantine on travellers from China and flight bans a practical way to contain the disease. However, there is no guarantee this will curtail its spread. In Japan, a bus driver working with a travel company caught the virus after ferrying around Chinese tourists.

Testing travellers from China, and then placing them in quarantine when they are showing no symptoms, will be a very difficult proposition for governments the world over. This will make containing the spread of the virus difficult. This week, two people from Kerala, who were evacuated from China, are reported to have ignored the Indian government’s request that they stay at home for a fortnight and left for Saudi Arabia.

Experts have pointed out that screening passengers from China creates a false guarantee that they are not carrying the virus because its incubation period is so atypically long. A throat swab test, for instance, would be ineffective if a traveller had no initial symptoms. Largely for this reason, the UK and India have used military facilities to quarantine passengers from Wuhan for a fortnight. Still, the need for honest declarations by travellers returning from China and Hong Kong, and the risk of non-compliance with such lengthy quarantine is likely to undermine efforts to contain the disease in much of the world, including in India.

Thus, the trajectory of the spread of the coronavirus, especially in densely populated countries such as India with inadequate public health systems, could be different than during outbreaks of SARS and Middle East respiratory syndrome. And, it explains why countries are responding with actions such as flight bans and quarantine that might otherwise seem draconian and which were notably absent in 2003, after SARS struck.

I covered the SARS outbreak in Hong Kong, and then moved to London on a routine job transfer in April 2003. The FT doctor decided I should spend a week in an informal quarantine away from the newspaper’s headquarters, prompting my witty woman boss to joke that this had made me “more glamorous than a war reporter". At no point was I screened by the UK government; I was even invited to a reception at Buckingham Palace a couple of weeks later.

In conclusion

The long tail of Chinese supply and demand in 2020 makes the world a very different place from what it was when SARS struck. China’s economy is 10 times the size it was in 2003.

Shortages across a range of Chinese imports will be visible to a larger degree in the next few weeks as businesses across the world prepare by building extra inventory. If Chinese factory closures continue after 10 February—and they are almost certain to, given the rapid progression of the disease across the country—companies that depend on imports from China will feel the effects soon.

The decision by some Indian solar power companies to invoke the disruptions in supplies of solar panels from china as a force majeure event to explain the delay in project completion is extreme but also an omen.

Rahul Jacob covered the SARS epidemic in 2003 as the Hong Kong bureau chief for the Financial Times.

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