Virus shuts down economy the size of Sweden for third week

A street view of Wuhan as seen on Jan 26, 2020. Wuhan is located in China's Hubei province, which is home to a wide range of industries.
A street view of Wuhan as seen on Jan 26, 2020. Wuhan is located in China's Hubei province, which is home to a wide range of industries.PHOTO: REUTERS

BEIJING (BLOOMBERG) - China's Hubei province is now in the third week of a shutdown triggered by the virus that has killed hundreds of people - and halted an industrial powerhouse the size of Sweden.

Every day of closure deepens the disruption to the nation's economy, and indeed the world.

China's largest producer of phosphorus, used in fertilizer, is there, and it's also at the heart of the country's auto industry, with local carmakers like Dongfeng Motor Group Co and global titans such as PSA Group and Honda Motor Co making vehicles and components.

Among China's earliest industrial centres, Hubei has grown faster than the national average for years. Well-connected rail, river and road transport is complemented by a steady supply of graduates from numerous local universities.

Shuttering this swathe of China's output poses questions for the government's economic targets, and the international companies reliant on the province's output.

The curtailment of business started on Jan 23, when the government ordered people to stay at home in the provincial capital of Wuhan, and progressively expanded the instruction to the rest of Hubei after that.

The province is home to a wide range of industries, as well as having a large education sector.

"The share of secondary industry in Hubei is larger than China's average, and it could impact industrial production nationwide" since it's not easy to find substitutes in a short time, said Mr Xu Gao, chief economist at BOCI Securities Ltd in Beijing.

"The magnitude of the influence depends on the development of the epidemic," he said, adding that the impact would be short-lived if it could be brought under control this month.

Hubei is not a major exporter. US$34 billion (S$47.21 billion) in overseas sales in 2018 accounted for just 1.4 per cent of China's total. That limits the global spillovers.

In certain industries, though, Hubei punches above its weight. Autos, healthcare, aerospace and defence, and construction materials are all sectors where Hubei factories loom large, raising the risk of disruption to supply chains.

 
 
 

Hubei's prominent auto sector poses one of the biggest risks at home and abroad, as it's vital for the broader economy and has an extensive supply chain. The provincial capital Wuhan is one of the top car-industry hubs in China.

More than half of the top 20 global parts makers produced components there before the virus broke out, according to China Automotive Technology & Research Centre.

Looking to the post-crisis recovery, industry in the province was healthier than peers before the disaster started, potentially easing debt-repayment pressures.

The services sector, mostly comprising private firms, is more at risk than industrial companies.

It's highly likely hotels in China will lose money in 2019, and the restaurant and catering sector will struggle to stay profitable, according to a research report by Huachuang Securities Co on Thursday.

"These labour-intensive sectors can create job pressures directly," said Huachang's chief macro analyst Zhang Yu.

While industrial companies can expedite production afterwards to make up for time lost during the epidemic, shopping malls, restaurants and hotels that are heavily dependent on shoppers will find it hard to do so, she added.

More than seven million people were employed at private Hubei firms in 2017, according to the most recent data, with wholesale and retail sales the biggest sector.

A similar number of people were registered as self-employed - meaning taxi drivers, snack sellers and the like. With many of those businesses closed for the foreseeable future, the outlook for both firms and workers is bleak.

Hubei's fiscal outlook this year isn't helping prospects. The augmented fiscal revenue of Hubei's government - including taxation and non-tax income such as land sales - was forecast to grow by just 2.3 per cent in 2020 from last year, according to Bloomberg calculations based on official data.

The situation will be even worse now, with the extended shutdown likely to hurt tax revenue and also damage demand for land, hitting another important source of government income.

 

On top of that, about 127 billion yuan (S$25.25 billion) of debt borrowed by the Hubei government and quasi-government financing vehicles is due to be repaid in 2020.

Not only does Hubei overall have a relatively high debt ratio, but the most indebted cities in the province have also seen a high incidence of coronavirus cases, according to Mr Li Yuze, an analyst at China Merchants Securities Co.

Still, the chance of defaults is low due to government support, he said.

These fiscal constraints and the cost of medical care for tens of thousands of sick people will mean there's less money, at least locally, to pay for stimulus and support for firms and companies when the epidemic ends.