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How will coronavirus affect business in China?

February 19, 2020

For the past few weeks, news outlets everywhere have been flooded with stories about the outbreak of a new virus. The virus, COVID-19, is also referred to as Coronavirus. It was first discovered in December of 2019 and has yet to be cured, which has led to economic and commercial complications around the world. As governments and SMEs take measures to mitigate its impact, many people are wondering how the coronavirus will affect business in China.

What is the coronavirus?

Coronaviruses are a family of viruses that are transmitted between animals and people and can cause a range of illnesses. This particular coronavirus, COVID-19 is a new disease that was not previously seen in humans. The International Committee on Taxonomy of Viruses named this version “Severe Acute Respiratory Syndrome Coronavirus 2”, which has been shortened to “SARS-CoV-2”. As the name indicates, this virus is similar to the one that caused an outbreak of severe acute respiratory syndrome (SARS) in 2002-2003, but it is not the same virus.

Economic effects of coronavirus

While there are many health concerns surrounding the outbreak of the coronavirus, the economic effects could be much longer lasting.

Coronavirus effects on interest rates

US Federal Reserve Chair Jerome Powell says there is “likely to be some disruption to activity in China and possibly globally”. He stated that the Federal Reserve is carefully monitoring the impact of the virus, but that it is content with where interest rates are. However, he also mentions “The Fed would prefer not to cut rates, but is ready to ease if the situation threatens to become serious enough.” This speculation has caused mortgage rates to drop, leading to a significant rise in refinancing; an increase of 207% compared to the same week last year.While the US speculates about the potential impact on US-based and foreign businesses, Chinese businesses are facing a more urgent situation. Concerns about prolonged impact have prompted China’s central bank to cut the interest rate on 200 billion yuan ($28.65bn) worth of one-year medium-term lending facility (MLF) loans to financial institutions – to 3.15 percent from 3.25 percent previously. This move aims to support short term stabilization for struggling businesses and also helped rally Chinese stock markets, further stimulating economic activity.

Business impact of coronavirus

As of February 2020, there have been cases in 24 countries. However, many countries that have not been directly affected are still feeling the squeeze. From quarantines to reductions in consumer spending and beyond, the coronavirus is putting pressure on businesses all around the world:

US & Canada

Despite there only being a few cases of the virus in North America, many businesses are facing adverse effects from the outbreak.US CorporationsBig-name companies like Apple, Nike and Starbucks have raised concerns about first quarter earnings due to the impact the virus could have on business in China.Casinos and hotelsReduced demand has led to lower revenues – Wynn Resorts said it was losing up to $2.6 million per day.Canadian oilPrices for crude (one of Canada’s main exports) has dropped by 15% due to lower demand.RestaurantsAfter news that a Boston man who traveled from Wuhan, China, was the state’s first confirmed case of the coronavirus, restaurant owners in US Chinatowns say that fewer customers are visiting their restaurants due to their fear of getting sick.Small business ownersPeople who own US businesses that rely on products or services from China are facing delays or cancellations due to disruptions in supply chains.Luxury goodsAccording to the World Tourism Organization, Chinese tourists spend about $258 billion a year while traveling, and over 40% of the world’s luxury spending is done by Chinese consumers. Without them, luxury goods in North America are facing a reduction in sales.

China

With over half of the country’s population under quarantine, China is feeling the effects of the coronavirus more than anyone else. Businesses are losing revenue, putting operations on hold and even letting staff go to save money as their sales drop.CorporationsCompanies like H&M, Uniqlo and Ralph Lauren have shut down many of their stores, while others have temporarily suspended operations.HospitalityDisney has closed both its Shanghai and Hong Kong theme parks while it waits for the virus to pass. On top of that, a number of hotels have ceased operations.AutomobilesMany large automobile manufacturers have temporarily closed their production plants. IHS Markit expects carmakers to lose about 350,000 units of vehicle production in the first quarter.FlightsA number of international airlines have reduced their flights to and from China or halted them altogether. OilChina’s largest oil refinery cut production by around 600,000 barrels a day due to shrinking fuel demandSMEsRecruitment site Zhaopin reported that roughly 10% of firms they surveyed were “on the verge of death”, 30% were planning job cuts and another 30% said they could not pay their employees on time.

Complications due to coronavirus

Independent of location, business disruptions caused by the coronavirus fall into three main categories:ConsumptionPeople want to avoid getting sick so they are spending more time at home and less time shopping, eating out or spending money.Events & conferences To avoid further spread of the virus, a number of events and conferences around the world are being cancelled and rescheduled.Supply chainFactory closures, gaps in distribution networks and other delays are hurting supply chains, preventing companies from operating efficiently – or at all.

Government support for businesses and consumers

The People’s Bank of China is aiming to stimulate growth through expansionary monetary and fiscal policy tools. Over the coming weeks, it plans to use the following tools to help stabilize the economy:Interest ratesAs mentioned above, the central bank of China is reducing interest rates to make business loans more accessible for those who need them to stay afloat.Tax breaks and subsidiesAiming to generate more consumption and ease the burden on consumers, the government is introducing new tax breaks and subsidies.Liquidity supportThe government is encouraging banks in China to provide liquidity support to help consumers and small businesses. Examples include waived fees, additional insurance coverage, moratoriums on principal payments and more.Reduced reserve requirementsIn an effort to encourage more loans to businesses and consumers, the central bank of China plans to reduce the reserve requirements for financial institutions.

Coronavirus relief efforts

Beyond government support for companies affected by the Coronavirus, many Chinese corporations are pitching in to make a positive impact:Alibaba GroupSetting up a 1 billion yuan (US$144 million) fund to purchase medical supplies for local hospitals in Wuhan and Hubei. It also joined forces with industry partners to create a global logistics channel to expedite the delivery of medical-aid donations to affected areas.JD LogisticsCreated a special channel to provide relief materials from across China to assist Wuhan. The company has also teamed up with medical experts to create live-streams that help educate the public on the epidemic.Tencent’s philanthropic foundationPledged 300 million yuan (US$43 million) to establish a new fund that supports coronavirus prevention and control efforts. Beyond that, the company also launched an out-patient clinic map that enables WeChat users to search for the closest health clinics.Baidu and Meituan DianpingEach committed 300 million yuan (US$43 million) in support.International companies and organizations are also doing what they can to help:BoeingDonated 250,000 medical-grade respiratory masks to help alleviate supply shortages in China. LVMH and KeringCommitted over US$3 million collectively, while Swarovski has contributed almost $500,000. Dell TechnologiesDonated two million yuan (US $300,000) to the China Youth Development Foundation.The Bill & Melinda Gates FoundationPledged up to US$100 million for the global response to the epidemic. This funding will go towards improving detection, containment, and treatments, protecting at-risk populations, and developing vaccines.

Bottom line

The UBS China Economics team estimates that China’s GDP growth will slow to 3.8% year-over-year in the first quarter and bounce back in the second half of the year. According to their numbers, the virus will bring China’s 2020 GDP growth to 5.4%, a substantial drop from the government’s official forecast of 6%. While the numbers are concerning, this report suggests that China’s economy will make a healthy recovery from the outbreak.In short, coronavirus continues to affect businesses in China and around the world, but there are sustained measures being taken to minimize the impact. The major effects include less consumption, idle factories and disrupted supply chains, which could directly impact revenues of small and medium sized businesses in and outside China. The exact impact and end of the outbreak are tough to estimate, but there are plenty of resources that can help SMEs navigate the setbacks.

Contributed by Peter Carleton, for Trustiics