The gradual slowdown of manufacturing behemoth China, the spike in the values of inflation-hedged assets such as gold, and central banks around the world adopting lax monetary policies were not enough to stoke the embers of fear within the global economy. Yet, a microbe, Covid-2019, more commonly referred to as the Coronavirus, has outdone these paradigm shifts in the global financial markets. Completely unexpected, the coronavirus has managed to spread itself from a fresh market in Wuhan, China to multiple continents, infecting tens of thousands of people in the process; with its spread, the virus has stoked fears of an economic collapse, rattling major financial markets across the world. As of now, the US Center for Disease Control has reported nearly 7.0 million cases of the virus globally, with around 400,000 people meeting their ends at the hand of this virus. Although China, the country where the disease originated and the country which the disease has primarily affected, has adopted stringent measures to prevent this disease from spreading, health and disease control authorities across the world are still not able to gage the severity of the public health impact this virus will have.
Ultimately, if one treats this problem from an economic point of view, two primary concerns stand out-the impact on China and the uncertainty associated with the final impact of the disease. Firstly, it is common knowledge that China has become a global manufacturing, technology and financial hub, one that connects businesses around the world to cheap manufacturing and a rapidly prospering middle class that is able to afford first-world price tags. Thus, a blow to Chinese manufacturing and business in general will likely impact businesses and consumers across the world. Secondly, financial markets, especially Wall Street, resent uncertainty, and uncertainty spooks financial markets regardless of how well they have been performing. Thus, the coronavirus could entail much more than the loss of lives and disease, but it harbours the ability to damage national economies. Yet, in the longer horizon, the corona virus and its associated impacts introduces a more pressing question-is the world too dependent on China?
China is the manufacturing titan of the world, and large-scale manufacturing industries comprise the core of the Chinese economy, accounting for roughly 30% of the Chinese GDP and around 10% of global manufacturing output-in effect, an affront to Chinese manufacturing is like besieging the global economy. After much of the global powers tried to downplay the economic ramifications of the coronavirus throughout December and January, realization finally struck the world economy in February as Chinese manufacturing statistics along with global consumerism numbers plummeted to fresh new lows. Most notably, the Chinese Caixin Manufacturing Purchasing Managers Index (PMI), which is designed to reflect the output of Chinese manufacturers, sank to a fresh 30-year low of 35.7 in the month of February. A reading below 50 on the Caixin PMI indicates contraction within China's manufacturing industries, and thus this statistic dumbfounded hardcore beleivers in the invincible Chinese economy. Soon, countless reports from local and international investment firms confirmed that Chinese manufacturing industries were operating at between 60%-80% of their full, optimal capacity. While Chinese President Xi Jinping responded promptly to this crisis by effectively shutting major Chinese manufacturing hubs such as Wuhan, Tianjin and Shenzhen, the supply shock was only one side of the double-edged sword that was piercing through the heart of the Chinese economy. Under the strictly-enforced containment measures undertaken in major Chinese cities, the Chinese government has been instrumental in curbing Covid-19's spread through China; in turn, Chinese manufacturing industries are once again opening their doors to their employees and resuming production. Yet, even as 'made in China' products continue to flood global markets, what good does it do if there is no one to buy it? As the coronavirus is an extremely contagious disease, it has spread to almost all over the world, prompting halts in national economic activity and consumerism throughout the world. Many nations that are large consumers of Chinese products, notably the US and prominent Eurozone nations like the UK, have limited economic activity as they have imposed mandatory shutdowns of businesses, social gatherings and other parts of civilian life. Consequently, as these nations impose more stringent quarantine and containment measures, they are limiting civilian mobility and consumerism as a whole. Malls and shopping centres that were once littered with energized consumers looking to purchase goods for themselves are now left bare and deserted as potential consumers isolate themselves in their homes and restrict their interaction with the outside world. Compounding this issue even further is the utter lack of preparation for pandemics in many of these nations. In the US, for example, it is only as of the second week of March that the Federal government has provided free, large-scale virus-checking centres for citizens who fear they may have contracted the coronavirus. This lack of preparation for pandemics like the corona virus have incited fear among the populace who are significantly limiting their exposure to the outside world, further halting consumer spending. Ultimately, first world nations across the world are claiming that economic activity will not normalize until the late summer months or even the third business quarter of the year.
While the skeptic may question the effects of a 6-7 month downturn for China, it bears an uncertain future for the titan of the east. For three decades, the Chinese economy has been outpacing and outperforming analyst estimates and consistently posting astronomical growth numbers that baffle economists. Now, that is changing. China is no more the economic 'golden boy'-no more the goose that lays the golden egg. According to Standard and Poor's, a financial services firm, China's GDP is projected to grow a meager 2.9% for FY2020, the lowest rate of growth since the end of the bloody Chinese cultural revolution and the death of Chairman Mao Zedong in 1976. This economic forecast cuts comes in the midst of China trying desperately to reinvigorate its large-scale manufacturing industry; again, the overarching problem for the Chinese economy is not their inability to produce goods but the lack of western consumers and clients to purchase their goods. Car and automotive sales in the US alone are predicted to decline by a whopping 20% for 2020, forcing countless US car manufacturers such as Ford, Chevrolet and General Motors(GM) to shut down production plants in China and the US. When car sales along with consumer spending start to rebound, car manufacturers will definitely enjoy larger profits and production facility expansions, but they will still bear the scars of the corona virus crisis, especially the effect on their Chinese plants and sales; this alone will prompt them to reconsider alternatives and hedges to the Chinese market. Covid-19 has proved that the world's most invincible manufacturing power and economy-one that has been undeterred in its meteoric rise for the last 3 decades-is just as vulnerable as any other economy. In effect, global multinationals that rely on Chinese consumers and production will look to diversify themselves in more markets as a way of giving themselves more income and supply chain security instead of placing their primary bets on China.
On a more macro-economic scale though, the Covid-19 is ripping its way through global financial markets, inciting fear that rivals that global stock market crash of 2008 and the Black Monday crash of 1987. Although global financial markets seemed to discount the economic implications of the corona virus throughout December, 2019 and January, 2020, they underwent a clobbering throughout February and March. The Dow Jones Industrial Average (DJIA) and the S&P 500 have declined more than 30% from their all time highs in January, officially ending the most prosperous bull market on record that began in March 2009; fear was clearly demonstrated in US and global financial markets the DJIA and S&P 500 recorded single-day declines hovering around 10% multiple times throughout March. European and Asian markets have been equally affected as their stock indices have recorded similar drops in valuations. Thus, the most primal element of the financial markets has cemented itself firmly, and it is showing no signs of disappearing anytime soon-fear is ruling the markets. While analysts and investors initially hoped that the markets would rebound from their modest losses and go on to achieve record closes-continuing the decade-long bull run-those hopes are but futile right now. Financial markets, while driven by company and economic fundamentals over the ultra long term, are primarily driven by investor sentiment; unfortunately, many investors and traders right now are flabbergasted by the unsettling, wild volatility and price swings in the markets, deterring the chances of strong global market rebound in the near future. Ultimately, investors and traders will strongly be favoring lower exposure to China in the future, again because this bear market has astonished so many, which in turn will lead them to favoring companies that diversify their production and consumer base outside of China. Chinese businesses could likely face major declines in foreign investor cash flow and business confidence-the golden goose of the east, nothing more than another one in the flock.
While the Chinese economy will likely pay the most significant price because of the coronavirus, it is important to realize that businesses and investors alike will not shun China simply because it is all of a sudden 'dangerous' to conduct business over there. Instead, this coronavirus economic crisis has shown investors and businesses that they have too heavily concentrated their hopes and bets in one economy, exposing them to greater downside risk; diversification in more emerging economies is the appropriate solution to such a dilemma. Once thought of as an unrelenting economic force that is sure to reward its investors, China has failed to live up to that name largely because of inflated expectations amongst investors and businesses.
In the end, judging from the manufacturing fallout and the global economic impact, one question surfaces: is the world too dependent and invested in China? While there is no doubt that the corona virus is a global pandemic that poses much more significant long-term consumer demand problems, the initial economic shock faced by the markets and world economies was due to a supply side shock coming from China. As the manufacturing powerhouse of the world, China was effectively shut down for a month, heavily impacting the availability of products for companies as large as Apple and Intel; this caused an initial market scare where businesses and investors were afraid that there wouldn't be enough products to satiate western demands and record healthy profits. On the consumption side, China as the most populous country in the world has been a major consumer target for large first world companies looking to sell their products to a graduating Chinese middle class. However, other emerging, albeit much more underdeveloped markets have been left untouched-what about the Subcontinent and Africa? As a result, businesses faced the double-edged sword of not having enough 'made in China' products to sell and a lack of willing Chinese consumers to buy their products. On a subtle note, this shows that China's economic boon has overshadowed the economic opportunity in other developing and underdeveloped world economies. First world corporations have for so long been obsessed and infatuated with the opportunity in China that they have blindly chased it for the last 30 years, reserving little awareness for other opportunities in smaller, but more numerous economies that offer greater economic safety and insulation. So, in a sense, the world has definitely trusted China with shouldering too much of the global economic burden. And as companies and investors evaluate their positions in China, maybe this crisis will provide them with the impetus to search for existing and lucrative economic opportunities in countries like Bangladesh, India, South Africa, Ethiopia and others.
While the reconsideration on the part of businesses and investors does not even remotely balance the scales in terms of the harms dealt by Covid-19, especially the thousands of lives that were claimed by the virus, it is somewhat of a bright patch of sunshine within the currently gloomy, ominous economic skies. As China loses its titanic status amongst world economies, this could likely create opportunities for the economic underdogs to shine through and present themselves as capable. In fact, especially in this economic era of eye-wateringly economic expectations from the Chinese economy, maybe it's time for the world's businesses and investors to finally awake from their dreams of the golden goose of the East.
© 2020 - All Rights with The Financial Express