Investing

As Coronavirus Spreads, Sensitive China, US, Global Economies Face Great Risks

Jon C. Ogg

The current coronavirus outbreak that originated in Wuhan in the Hubei province of China has become even more deadly and less contained. To add on more fears, there are now indications that the virus is easier to spread than originally thought. As of January 26, 2020, with official estimates still changing, there are more cases and more fatalities than global health officials would have hoped. The reports now indicate that the virus can be spread even before symptoms appear.

Saturday’s count of more than 1,300 reported cases and more than 40 deaths has, as of Sunday morning reports, risen by perhaps another 1,000 cases with close to 60 deaths. On top of Wuhan and surrounding cities being closed off, outbound group travel from China has been suspended, and Hong Kong is now denying access to anyone who has been in Wuhan in the past two weeks.

The loss of life and suffering from illness is always the worst part of any outbreaks, epidemics and pandemics. Unfortunately, there is also an economic case that has to be considered in a global economy in which a virus moves from one nation to others. This is when portions of local economies have shut down and the impact begins to spread into other sectors and to other nations.

Wuhan is a city of more than 11 million people and is a major transportation hub inside China. The United States has organized a plane to remove Americans from the city and other nations are pursuing the same strategy. Shutting down a major transportation and manufacturing is one thing, but that tally of over 11 million people is roughly the size of the official populations of New York City and Los Angeles combined. With more cases and with more countries on the list of confirmed cases, the coronavirus is bringing additional challenges to what are already very fragile economies. Billions and billions of dollars are already showing up in stock losses for the companies with direct and indirect exposure.

To complicate the economic and fiscal impact further, the rapid spreading of the 2020 coronavirus outbreak in China also hit right at the start of Chinese New Year, which happens to be the Year of the Rat. The Lunar New Year was already expected to close much of China for the week ahead. Now the coronavirus has brought event cancellations. China has temporarily closed some 70,000 movie theaters to help curb the spread of the coronavirus, and large event venues are being closed for the time being. Again, all this comes with a serious loss to the economy.

This coronavirus outbreak is far from the first such case in the modern era. SARS, which was reported to be less than 1,000 deaths back in 2003, was perhaps the most memorable of the outbreaks in Asia as one of the first modern-era global scares. That had a direct impact on travel to China and the surrounding nations. There have been multiple Ebola scares in the past few years alone coming out of Africa. A cholera outbreak in Yemen, swine flu in India and other outbreaks have been far more deadly than the current numbers indicate. Also, multiple scares from swine and avian flu have been great concerns and have devastated animal populations. The 2019 African Swine Flu devastated China’s pig population, and China has imported record levels of pork and other meats to replace the demand.

There is no simple way to try to minimize or discount deadly viruses and other outbreaks. One relative reference would be that tens of thousands of deaths in the United States alone can come from each flu season. The U.S. Centers for Disease Control and Prevention (CDC) already has estimated that the 2019/20 flu season has seen 15 million to 21 million cases of the flu through just January 18, 2020, with 140,000 to 250,000 hospitalizations and an estimate of 8,200 to 20,000 flu-related deaths. As with most illnesses, the mortality rates are generally much higher among infants, the elderly, those with cardiopulmonary conditions and those with compromised immune systems.

China has halted almost all public transit in and out of Wuhan and the surrounding areas in an effort to contain the coronavirus from spreading even more than it has. On top of the isolated cases in the United States, confirmed cases have also been reported in Vietnam, Thailand, Nepal, South Korea, Japan, Singapore, France, Australia, Taiwan and the territories of Hong Kong and Macau. Canada has been added to the list of nations, and as of Sunday morning there was a third confirmed U.S. case in California from a patient who had traveled to Wuhan.

At this stage, it may seem too soon and too difficult to try to calculate the economic impact in China, the United States and globally. Most pandemic scares and other geopolitical scares usually come with only short-term economic and market impacts. What is not impossible to see right now is that there have already been billions and billions of lost market capitalization rates in dollars among just some of the top Chinese companies listed in America and in the value of U.S. companies that have direct exposure to Wuhan and other closures or curtailing of operations around China. Still, oil fell on Friday for the fifth straight day, with part of the blame on weakening demand if the coronavirus threat grows, and that removed billions of dollars worth of value in the already weak energy sector.

General Motors Co. (NYSE: GM) has a large manufacturing facility in Wuhan, as do other global automakers. With a 1.6% loss to $34.31 on Friday, GM lost about $750 million in market cap. Anheuser-Busch InBev S.A. (NYSE: BUD) has a large brewing facility in Wuhan, which was its first in China. Its American depositary shares (ADSs) fell 0.66% to $77.74 on Friday for a loss of close to $1 billion in market capitalization. Other U.S. and western businesses are halting or curtailing operations locally or around China.

Walt Disney Co. (NYSE: DIS) announced that it was closing its Disneyland and Disneytown parks in Shanghai. Its shares slid 1.5% to $140.08 on Friday, and while that’s not the end of a run, it is a loss of $3.8 billion in market capitalization. That also represents the lowest closing price going back to last November, before its shares jumped from about $138 to $147.