Will the current Wuhan Coronavirus epidemic be worse than SARS? And if so what does that do to the world and particularly the world economy?

Quick answer is yes, but not a massive pandemic and it’ll be bad but not disastrous for most of the globe. The PRC, however is probably in a world of hurt

The Virus

A big part of the problem is that we really don’t know what’s happening in Wuhan or even really what happened there. It seems very clear that, despite brave whistleblowers in the medical area, overall the authorities were in denial about the disease until mid January. This allowed for it to spread a lot further than it otherwise might have. Right now reports from Wuhan are not good. There are stories of corpses being left in place in hospitals because of a lack of time or mortuary space, people being stashed in makeshift quarantine locations that seem designed to help spread the virus amongst them and so on. Plus there seems to be evidence that people can be infectious for several days before developing symptoms (and that symptoms can start mild and worsen)  However on the positive side this is a city of 11 million people and even fairly pessimistic numbers based on Chinese deliberate undercounting have less than 100,000 people infected and 2000 currently dead (the best official figures seem to be collated in this visualization and as of writing show about 27k infected in Hubei province of which under 800 have died). It seems hard to see how this gets to John Ringo novel levels of megadeath on its own.

Now I could be wrong and the Chicoms are hiding a lot of deaths. This twitter thread contains some images showing high levels of Sulfur Dioxide emissions for Wuhan and Chongqing (see example below) and states as a hypothesis that this level of SO2 is likely a result of mass cremations.

However even if that is the case, the spread outside China is still very low. We’re now two weeks after Chinese new year and the lucky few Wuhan residents who got out early for a vacation would likely have infected people if they could have (in fact we know they did, three(?) of the cases in Japan are from people who were taking Chinese tourists around Japan). So we’re at the point where if this thing was super infectious and super bad we’d be seeing large outbreaks elsewhere. As of writing the largest outbreak outside the PRC is the Diamond Princess cruiseliner (and if you wanted to have an ideal location for a virus to spread it is hard to better a cruiseliner) and even that is no more than some 2% of the people on board after a solid week or more of people mixing since they were exposed to infection in Hong Kong. Moreover it seems like many of the more seriously affected people are those with weaker immune systems (this isn’t 100% true but the exceptions seem to mostly be medical staff who have been repeatedly exposed to the virus so it does seem like a decent rule of thumb) so if you’re basically healthy you’ll probably be fine.

In fact it’s probably better than that, the disease may be bad in the PRC, but even there it would seem the vast majority of reported cases are in Wuhan and the surrounding area. Of the ~37k reported infections and 800+ deaths, about two thirds of the infected  (27k) and all but a handful of the deaths are in Hubei. We may see a tick up in deaths elsewhere but unless every other province but Hubei is lying their heads off and understating by factors of one or more orders of magnitude the current measures seem to be stopping widespread infections elsewhere. This article at WUWT has an interesting hypothesis on why things seem to be worse in Wuhan compared to elsewhere. I don’t have enough background to know whether it is correct but it makes sense of a number of observed facts. Another alternative floating around the net is the “accidental biological weapon release” hypothesis (see ESR’s post here for example) which also suggests that if you’re not a local you’re not going to die so all it does is pile up the bodies in the PRC and not so much elsewhere.

However I’m going to stick with “this is nasty but not OMGWereAllGonnaDIE!!!!111!!!!” This is particularly true since at its base this new Coronavirus is related to the common cold and we know how to minimize that spreading: wash your hands frequently; wear a mask to not breathe in other people’s saliva – even if it’s of questionable benefit; avoid meeting people face to face etc. More to the point, people are taking these guidelines seriously – as a data point it seems like face masks are pretty much sold out in Japan (I discovered that even here in rural japan there are none for sale “not even for ready money”) and that seems likely to be the case in S Korea, Taiwan, Hong Kong, Singapore… Plus governments are trying to quarantine potentially infected sorts (and people are self-quarantining and avoiding obvious venues where infection seems likely such as Chinese Restaurants (cue cries of RACIS!!!!!), airports etc. In fact I’ve seen a wide variety of news items saying that travel in general and tourism in particular is down. Down by a huge amount in the places that expected Chinese travelers but also down in other places too. So. Unless there’s a secret reservoir outside China that we don’t know about (if there is it’ll be in one of the SE Asian nations like Indonesia, which have reported a grand total of ZERO infections unlike their neighbors) this virus is unlikely to spread catastrophically outside the PRC (and possibly Macau/Hong Kong) and even if it does become endemic in poorer nations it should be fairly easy to avoid in richer ones for people that take sensible precautions.

Working on the assumption that the current spread of cases is accurate (60%+ Hubei, 30% rest of PRC, under 10% everywhere else) and that the mortality rate remains at or below the current 2-4% and going on a WAG infection rate of less than 10% of those exposed I think we could be looking at a worst case global death rate in the low millions (say 2 million or so) of which all but a few tens of thousands will be in the PRC and 60% in Hubei. Quite likely the body count will be in the thousands (or possibly tens of thousands) with just hundreds in the rest of the world and if the various quarantine measures work we could see just thousands in the PRC and only a few dozen outside. All in all I would guess the death rate outside the PRC (and probably within the PRC but outside Hubei) is going to be an infinitesimal blip on the regular mortality figures.

So what does this do to the global economy?

I’m doing this analysis based on the theory that we won’t see a global pandemic and that even within China actual infections and fatalities will be relatively low – albeit higher than currently reported because, as everyone knows, the Chicoms will definitely be lying a bit (so a total of thousands of Chinese deaths, possibly 100 outside the PRC). If we’re in global pandemic mode (millions of deaths worldwide) then the simple answer to “what does this do to the economy?” is simple – it causes a depression to make 2008 seem like a minor blip.

Most obviously the tourism and travel sectors, particularly the ones that rely on visits to/from the PRC are going to take a hit. There may be some substitution as people who would have gone to the PRC go somewhere else but I think it is pretty clear that overall levels are going to drop because of the obvious fact that airports and planes are extremely good places to inhale the potentially infected exhalations of numerous strangers. Also I suspect people will be rethinking cruises, particularly cruises in the Pacific/Indian oceans. On the other hand that may mean that there are bargains to be had by those who do venture out and if, as I expect, in another 30 days or so it becomes clear that the virus was limited to the PRC (and to Wuhan in the PRC) then I expect volumes of non-PRC travel to pick up again quite quickly.

However there’s a big question of what idling Chinese factories for several weeks will do to the general economy. Right now we have Chinese companies reneging on contracts to purchase raw materials, which isn’t good for the exporting nations if this continues, but overall isn’t a huge global economic hit. In fact it will likely benefit other consuming nations by lowering their import prices for a short time. If Chinese demand doesn’t pick up then there will be layoffs in some extractive industries but since a good deal of Chinese imports are consumed to make good for export, assuming other nations such as India can pick up the slack the overall hit should be modest. About the only place where Chinese factories won’t get substituted in the short-medium term are the fossil fuel ones. If the Chinese economy stops growing so will its demand for energy and that will lead to lower oil, coal and gas prices for the rest of the world. That will of course hurt the producing nations, especially those in the gulf who have almost their entire economy based on fossil fuel extraction. I am not, to be honest seeing much of a downside here regarding the rest of the world though because these countries are a small market for imports, although the European luxury trade may be impacted by this and by the whammy of a lack of Chinese customers in their stores in Paris, Milan and so on.

That’s the easy bit. Over at his blog, Peter Grant has a link filled article pointing to potential supply chain problems and there are a number of other pieces worrying about the automotive industry in particular as Wuhan is the Detroit of the PRC and home not just to Chinese vehicle factories (both domestic and foreign) but also to component suppliers who export a significant fraction of their production. Undoubtedly other industries will also discover that parts of their supply chain are in the PRC and that they don’t have a non-Chinese second source. However, assuming we’re looking at a month or two of disruptions to the PRC manufacturing sector, this is going to be a quick hit and a major incentive for every manufacturer in the rest of the world to second source components from somewhere else and also to look at storing two or three weeks capacity of components etc. Thanks to Trump and his trade war this was in process to an extent so the virus is likely to accelerate deals that were already under evaluation. Longer term that’s going to be bad for the PRC but it seems to me it can only be a good thing for the global economy as a whole which will become significantly more resilient to future shocks.

Some of the effects may be less direct than the supply chain ones. There’s also the effect of a significant slump of demand within China. Consider the car company Tesla. According to recent reports Tesla is banking on sales in China from its new Shanghai factory to continue sales growth:

Tesla reported strong earnings in January, beating expectations and meeting CEO Elon Musk’s goal of selling more than 360,000 vehicles, largely thanks to its new factory in Shanghai.

Are those sales going to continue? Is the factory going to be open? (answer to the latter – right now no and I’d be really surprised if Tesla is making any Chinese sales either). Tesla is not alone. Any number of entities who were expecting the Chinese consumer to be a significant portion of their customer base in 2020 look likely to take a hit to earnings. The good news is that in many cases (Tesla and other car companies being excellent examples of this), much of what was expected to be sold to Chinese consumers was also expected to be manufactured within the PRC so non-PRC capacity is unlikely to be massively effected. However the hit on income, cashflow and profits is certain to cause stock market issues and that will probably have a knock-on effect as the boom in investment portfolios stops.

To be honest I suspect a minor hit to the US economy, larger but not too nasty hits to the major economies within Asia/Oceania (Japan, S Korea etc.) and while most of Europe will be similar there could be a near fatal hit to some European economies. I think that France and Italy are particularly vulnerable to a one-two of a loss of tourism and a loss of luxury goods exports. Germany may partly benefit as new factories order new machine tools and partly lose as large German companies (Siemens, the car makers) lose production and supply chain in the PRC. Overall I’d guess it will lose in the short term and then gain. What this means is that the British Brexit negotiators have an excellent chance to negotiate a good free trade agreement because the main EU nations (Germany France) don’t want to see their UK trade drop at the same time as their Chinese trade does. Other developing nations (Vietnam, Malaysia, India etc.) may see a net benefit as companies seek to diversify away from China to other low cost manufacturing locations.

If I’m understating the seriousness of things then I think the relative effects are going to be similar (i.e. US least effected, EU and Gulf most) but everyone gets some nice economic recession or possibly depression while global supply-chains reconfigure to avoid the PRC. Note that I still seriously doubt that the virus will be massively fatal outside the PRC.

Implications for the PRC and the Chinese Communist Party

This is where it gets interesting. It is obvious that mishandling this is going to damage the reputation of the Chicom leadership – it already has to a degree. Mishandling it, lying about that and then getting caught doing so is going to damage it more. I strongly suspect we’re going to see a lot more lies and evasions uncovered and thus a lot more damage to the CCP’s reputation. The worst thing this will do (has done already in fact to a significant degree) is destroy the trust that the average person had in the official state media and security services. Right now, everything I’m reading suggests that Chinese social media is awash with scary rumors, worrying videos and so on while the official state media are reporting nothing of the sort but are reporting on the heroic efforts of the glorious sons of the revolution in their construction of new hospitals. Question: how many Chinese wonder why new hospitals need to be built in 10 days if things are under control?

Meanwhile his supreme Pooh Bearness is barely seen in public and even people like the Mayor of Wuhan who have been caught playing things down are still in charge and not contemplating a future as an involuntary organ donor. This sort of thing gets noticed and commented on, even if the comments are not necessarily in public (or are censored if they are).

The country is in lockdown. Some factories are now reopening after an extended break others aren’t. Lots of trade and transport is screwed up (see global supply-chain above). The Chinese banks have been ordered to extend low interest loans to try and keep businesses afloat (prediction: most of the loans will go to the businesses that are well connected to the CCP, and this will be noted). It seems clear that, no matter what the global economic effect is, the effect on the Chinese economy is going to be large. And negative. This is going to hurt a lot. People aren’t going ot get paid or if they are getting paid will not be getting overtime etc. that means they are going to cut down on discretionary spending, which will have a knock on effect as the salesfolks in the malls and so on see lower sales and hence lower wages. In fact I suspect a lot of shops are going to fire a large chunk of their shop assistants and much the same will apply to larger restaurants. Smaller mom and pop restaurants and shops may simply go bust. That in turn will urt the landlords who won’t get rent and the vicious spiral continues. In the past the PRC has been able to count on export markets to support the economy and that is no longer the case. First, the economy is a lot bigger these days and exports are a smaller proportion, plus as noted above, potential purchasers of Chinese exports will be looking at second sources.

In the short/medium term I’m sure the Chicoms will attempt to counter the drop in demand by building internal infrastructure. The experience from Japan is that this may lessen the pain to an extent but it prolongs it considerably. So that’s another crack in the dam of CCP control. And the cracks will be larger if (when) the corruption in such infrastructure deals becomes apparent. I have no doubt that loyal sons of the party will get the juiciest contracts and that they’ll cut corners to pocket more cash and that some of those cut corners will result in engineering failures.

I don’t expect this crisis to end the Chicom rule – aside from anything else they’ve co-opted all possible competitors – but I do expect it to add significantly to the opposition and the general distrust of the rulers which was so key to the eventual death of the Soviet Union.