MUMBAI (Reuters Breakingviews) - The coronavirus outbreak in China has economic consequences as far-reaching as the spread of the infection itself. Citywide quarantines and fear of contagion are challenging the world’s second largest economy as it attempts to go back to work in the midst of an ongoing epidemic that has killed at least 908 people. High-income countries such as Australia, Japan and South Korea will suffer because of their trade ties with the People’s Republic. But poor nations that depend more on China for trade, visitors, and funding will be hardest hit.
The United States grumbles loudest about importing more from China than it exports but has a relatively diversified bunch of trade partners and is less reliant on exports to drive growth. China was the source of a fifth of U.S. imports in 2019 and the destination for just 7% of its exports, according to International Monetary Fund data.
True, some American companies like the $1.4 trillion Apple and $100 billion Starbucks are highly exposed to disruptions. For example, the latter has closed half its China stores. And even a mild slowdown in U.S. growth will have an outsize impact on global economic activity. But the pain amongst rich economies will be greater for those geographical closer to the source of the viral outbreak.
Australia and South Korea, which each account for around 2% of global output, are particularly vulnerable. The former is already reeling from months of bushfires and depends on China for almost one quarter of imports and over one-third of exports. After commodities, education-related services is its biggest earner of foreign exchange with almost two out of every five international students coming from China. Many travelled home for the long Lunar New Year Holiday and are now stuck there because of an Australian ban on travel from China. Some now complain about being treated like “cash-cows” and may be loath to return.
South Korea is similarly dependent. Hyundai Motor, the country’s biggest carmaker, has already suspended production at its home factories because disruption in China means it can’t get the parts it needs. Local companies are in poor shape to deal with any pain given their weak earnings and high debt-to-income ratios, according to ANZ. The South Korean economy was already set to grow last year at the slowest pace since the financial crisis and consumer spending will take a further hit because of Beijing’s ban on outbound tour groups: China is the biggest source of visitors.
More exposed in absolute terms is Japan, whose economy accounts for almost 6% of global output. China is the source of roughly a fifth of its imports and destination for about the same proportion of exports. Virus-related disruptions are already making their mark. Automaker Honda Motor and retailer Fast Retailing’s operations in the People’s Republic have been affected while Hitachi expects an impact on its supply chain. Japan’s service sector will also be dented given it depends on a healthy supply of Chinese tourists: some 8 million of them visited Japan in 2018, according to the World Tourism Organization.
The sad truth, though, is that poor nations stand to be thrown off-course the most. More than half of the countries that are most dependent on Chinese imports and exports are ones with GDP per capita half that of the People’s Republic.
Some, like Mongolia, Myanmar and Vietnam are exposed on three fronts: trade, tourism and foreign direct investment. Mongolia sends over 90% of its exports to China. And watermelons, for example, are now being left to rot in the fields in Myanmar because logistics at the border are jammed. Chinese investments and contracts were equivalent to 17% of Cambodia’s GDP last year, and almost 14% for the Solomon Islands, based on data from the American Enterprise Institute’s China Global Investment Tracker. Funds will run short, at least in the near-term, if Beijing urges companies to redirect spending to the domestic market.
For all the uncertainty, the coronavirus outbreak is a stark reminder of the risks of the world’s rising reliance on the People’s Republic, where growth is increasingly driven by domestic consumption. Beijing’s ability to control the spread of the virus so that factories can reopen and people can return to the streets and spend will determine how quickly economic activity recovers within China’s borders and far beyond.
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