As Coronavirus Impacts China’s Economy, Phase One Trade Deal Purchases Now At Risk
The phase one trade deal is looking worse by the day.
China is supposed to buy a lot of American soybeans, and chicken and pork and airplanes and car parts, but now that the economy is facing its worse public health crisis since the SARS outbreak in 2002-03, who thinks China can make good on spending upwards of $200 billion this year on American goods?
Here are two things to consider. First, Huawei.
Huawei is no longer in a choke hold. It was long seen as being held hostage in trade negotiations. The Pentagon has blocked the Commerce Department’s steps to make it harder for U.S. computer hardware manufacturers to sell components to Huawei. The Trump Administration sees Huawei as having grown, in part, due to theft of computer codes. Now they are one of the biggest developers of 5G technology, rivaling U.S. and Swedish multinational Ericsson.
In addition to the Pentagon being okay with Huawei to some extent, the U.K. went against Washington lobbying efforts to block Huawei from bidding for 5G projects last week.
With Huawei no longer in the dog house, China may feel a little emboldened. They’re not so hated, after all.
The virus is spreading. The World Health Organization called it a global public health emergency last week. And while it is largely contained within China’s borders, Chinese officials hate being embarrassed. They do not want more deaths abroad because of coronavirus. A Chinese national, aged 44, died in the Philippines last week. Although the man was from Wuhan, the epicenter of the outbreak, China does not want be seen as failing to contain the virus. It is spending a lot of money, including building a 1,000 bed hospital just for coronavirus patients in Wuhan.
China can say to the U.S., ‘what do you want us to do? Spend money containing this thing, or buy more American soybeans?’
Here we go. Today on Bloomberg:
Roughly two-thirds of the workforce in China are expected to be on lockdown and cannot go to work. Factories and stores such as all of China’s Apple Stores are closed. Starbucks stores are closing, Starbucks CEO Kevin Johnson said on CNBC on January 29.
“We assumed that the growth shock was around 1% to 1.5% of GDP in an economy likely running at 4.7%,” says Sebastien Galy, senior macro strategist for Nordea Asset Management in Luxembourg.
China’s best argument to comply with its trade purchase order agreements is that it has the world’s No 2 economy to protect. If China goes down, she’s taking Asia down with her.
Goldman Sachs analysts say the coronavirus will lower Chinese GDP growth 0.2% points in the first quarter. Should the coronavirus not be sorted by the time the Summer Olympics kick off in Tokyo mid-summer, Japan would lose a growth boost from the Olympics. Growth in Japan is already anemic.
Back in 2003, during the SARS outbreak in China, China accounted for just 4% of global GDP, compared with 16% today. China’s GDP growth was nearly 10% a decade ago, but in dollar terms it is more than double the size of China 2009. China’s economic growth matters to the world economy. The coronavirus is the black swan for 2020.
No sense ordering car parts from Detroit if the factory isn’t open.
The IMF’s recent update of its World Economic Outlook, published just before the coronavirus outbreak, talked about a ‘tentative’ and ‘sluggish’ economic recovery. Now, investors are pushing back the date of any recovery into the second quarter and recognizing that the economic damage will not be contained in China, writes Neil MacKinnon, an economist with VTB Capital in London. “The likelihood is that investors will start pricing in a lower growth outlook,” he says.
Quality control and supply chain compliance provider, QIMA, said China’s growth slowdown will last until Mid-March and would “wreak havoc on global supply chains,” says QIMA CEO Sebastien Breteau.
On paper, China’s economy was growing.
China’s official manufacturing PMI was at 50 in January from 50.2 in December, in line with market expectations. The moderate drop could be driven by the Lunar New Year holiday and the outbreak of coronavirus.
The full impact of the coronavirus has yet to be seen in China’s economic data. The latest data should look much worse seeing how the Chinese government shut down Wuhan city, a city of roughly 11 million people, and imposed draconian measures in other regions on January 23. The data for January PMI was collected before those measures were introduced.
What can we learn from past pandemics? Economic growth and financial markets have historically responded with a V-shaped recovery pattern once fears subside. The temporary hit to economic activity results in pent-up demand, which eventually helps fuel the rebound in economic activity.
How long will that take? SARS lasted 8 months. If this is as bad, this takes China until August, well into a U.S. election year. Beijing may then decide to sit on their hands with regards to phase one trade purchase agreements and wait to see who wins the election in November.