That rush to a perceived safe haven is echoed in the strengthening of the US dollar against the basket of its major trading partners’ currencies, the flip side of which is an Australian dollar that has weakened from around US70 cents at the start of this to trade just below US67 cents.
It is obvious that China’s economy will be hard hit by the virus. The epicentre of the crisis, Wuhan and Hubei Province, are key manufacturing, transport and logistics hubs. More than 50 million people in the province are now in lockdown in the world’s largest-ever quarantine.
With the virus still spreading rapidly throughout China – almost all of the 17,000-plus confirmed cases so far are within China, with only a relative handful elsewhere – its industries and consumers are going to be adversely impacted, with the major uncertainties being the related questions of severity and duration.
At an economic level, the visible response of the Chinese authorities has so far been measured, with an injection of the equivalent of $US173 billion ($258 billion) of liquidity into their financial markets on Monday. That failed, however, to stop their stock market falling about 8 per cent, its steepest one-day fall since 2015.
China does have the option of embarking on a large-scale stimulus program, lifting some of the constraints on its shadow banking system and opening the government’s coffers for a massive infrastructure spending program. China’s capacity to respond in the way it did to the financial crisis is, however, limited by the degree of leverage in its financial system.
For other economies, the epidemic probably ensures that, at the very least, monetary and fiscal policies will remain loose as insurance against a coronavirus-inspired global downturn.
More rate cuts and unconventional monetary policies should underwrite, to some extent, the continuing performance of financial markets that have become ultra-dependent on cheap liquidity.
With China providing about a third of global economic growth and the global economy in a fairly fragile condition, the virus will shave something off global growth with the extent to which it spreads – and, again, its duration – determining the severity of the impact.
The trade conflict between the US and China had a marked impact on global supply chains that, over the past decade, had increasingly been anchored in China.
While China remains central, a lot of global manufacturing activity has been relocating elsewhere in Asia and, unless the coronavirus is contained, that trend could be expected to accelerate.
Further diversion of activity from the world’s key manufacturing centre would be a massively disruptive development, with the potential to either continue to significantly reshape global supply chains or even to collapse them and reverse the globalisation of economic activity.
China’s ability to meet its commitments in the trade deal it struck with the US late last year is also now in question.
It is supposed to buy, starting this month, an extra $US200 billion of US goods (measured against its imports in 2017), with $US76.7 billion of that $US200 billion this year and $US123.3 billion next year.
Even if the virus is short-lived it will have a nasty impact on China’s already-weakening economic growth rate which, at just over 6.1 per cent last year, was its slowest in nearly three decades. That slower growth and the steadily spreading travel restrictions, inside China and between China and the rest of the world, will inevitably impact on its ability to deliver on those commitments.
There is a “get out” clause in the trade deal that allows for consultations in the event of natural disasters or other unforeseeable events.
China could be expected to invoke it, which has implications for the US economy, particularly its farmers, and potentially for the election later this year, given that the trade war is one of Donald Trump’s claimed key achievements. That could be awkward for Trump and reignite friction with China.
This was supposed to be a calmer and more positive year for financial markets and the global economy after the trade ceasefire between the world’s two largest economies, with tensions between the US and European Union and Brexit the most likely sources of any new threats.
Whether or not the spread of the coronavirus is slowed and then halted (other major epidemics such as SARS or bird flu have been relatively short-lived), the first half of this year, at least, is likely to be somewhat more volatile and economic growth rates somewhat lower than they might otherwise have been.
Stephen is one of Australia’s most respected business journalists. He was most recently co-founder and associate editor of the Business Spectator website and an associate editor and senior columnist at The Australian.