The first American victim has been killed off by this sudden-onset Chinese threat. Seven-
time champion Serena Williams is out of the Australian Open at the hands of Wang Qiang...
Aside from that, there's an economy that's much worse than officials let on, and a disease
outbreak that's much worse than officials let on, both afflicting China on its most-important
holiday of the year. So the Tianjin-born baseliner, who lost 6-1 6-0 to Williams in the U.S.
Open quarterfinals, has delivered a very welcome dose of good news back home on Lunar
New Year's Eve with Friday's 6-4 6-7 7-5 third-round victory.
Nobody here in Hong Kong trusts the other score. The official tally is that what Hong
Kongers are calling WARS (Wuhan Acute Respiratory Syndrome) has as of Friday claimed 25
lives, is confirmed in 830 cases of pneumonia, and is suspected in another 1,072 cases in
China, according to China's health authorities. Since Wuhan officials early in the outbreak
encouraged cremations immediately after suspect-sounding deaths, and since overwhelmed
Chinese doctors have been turning away patients who aren't seriously sick without testing
for the virus, we can safely assume all those counts are far lower than reality.
How are investors keeping score? For starters, National Australia Bank's research team have
said tentatively that "Novel Coronavirus 2019-nCoV" could shave 1 percentage point off
China's GDP in Q1. Globally, investors seem reassured that the World Health Organization
says this is an emergency in China, but doesn't yet qualify as a Public Health Emergency of
I said on Wednesday that it didn't make any sense that Chinese shares were rallying. It
didn't, and it didn't last long. China stocks got crushed on Thursday, with the CSI 300 index of the
300 largest companies in Shanghai and Shenzhen plummeting 3.1% for the day. They have
further south to go, down only 4.8% since the start of last week.
Hong Kong stocks, which have lost 3.8% in the last week, have had a strange leap of faith on
Friday. On a day of gains in Asia, the Hang Seng closed up a narrow 0.15% in a curtailed half-
day of trading. Mainland markets are already closed for the Lunar New Year holiday. Chinese
investors will have a whole week to fret about the impact of WARS, with trading in mainland
markets due to resume on Friday Jan. 31.
There'll be an arbitrage opportunity in Hong Kong, where markets will open back up on
Wednesday Jan. 29. By then, we'll with have a better assessment of just how far WARS has
My wife has been stocking up on face masks. Defensive stocks and the safe-haven Japanese
yen are proving popular in Asia, too, with the Chinese yuan selling off.
Besides the NAB's early estimate of WARS damage in China, for the United States we can
also look to a 2006 estimate by the Congressional Budget Office of what a severe outbreak
of avian flu could do. The CBO said a widespread American outbreak of a not-so-serious
disease would deliver a 1 percentage point shock to U.S. GDP. A deadlier variety would
knock 2.5 percentage points off the U.S. economy, it estimated.
That's some way off. For now, the international spread appears to have stemmed, with four
cases confirmed in Thailand, three in Singapore, two each in Hong Kong, Japan, Macau,
South Korea and Vietnam, one in Taiwan, and of course one just outside Seattle. But since
the incubation period is estimated at between 5 days and 2 weeks, we'll need to assess the
true extent of the damage after the Lunar New Year holiday.
SARS, which bears the greatest similar to WARS both in terms of the disease itself and its
regional impact, shaved 2.6 percentage points off the Chinese economy and 1.1 pp off Hong
Kong, according to a 2003 estimate by two professors at Australian National University.
WARS will undoubtedly hit consumer spending in greater China over Lunar New Year, and
perhaps beyond. Standard & Poor's notes that consumption is the key driver of the Chinese
economy, contributing around 3.5 percentage points of its overall 6.1% GDP growth in 2019.
S&P's "back of the envelope" scratchings suggest that if consumer spending falls by 10%,
China's overall GDP will fall by 1.2 percentage points. That's assuming consumers make
about 20% of their spending on discretionary entertainment and travel.
Hoteliers in Thailand and Vietnam will be holding their breath. Thailand is the No. 1
destination for Chinese tourists, which account for 25% of arrivals in both Thailand and
Vietnam. S&P isn't updating any GDP estimates yet. It's still too early. But the rating
agency notes there are complicating factors.
That Wuhan is the center of the epidemic could have serious implications for the
automobile industry in China. It's home to 10 major car factories, including operations for
Honda Motor (HMC) , Nissan Motor (NSANY) , Renault (RNLSY) , Peugeot-Citroen (PUGOY) and the
Chinese automakers SAIC Motor SH:600104, Dongfeng Motor Group (DNFGY) and Geely
Automobile Holdings (GELYY) . Surrounding those factories are hundreds of auto-parts
You couldn't pick a much better epicenter than Wuhan, which the municipal government
says has a population of 9.8 million. It's almost dead center among China's developed
eastern provinces, 500 miles inland west of Shanghai. It's at the nexus of north-south and
east-west high-speed rail lines, a major inland port on the Yangtze River, and ships around
1.2% of China's total freight.
The virus has now cropped up in every Chinese province, bar Tibet and Qinghai in the
very southwest. One of the deaths occurred near Beijing, albeit an 80-year-old man who had
recently spent two months with relatives in Wuhan.
If there's a saving grace, it's that this virus appears to be less deadly than either SARS or
MERS. The median age of the deaths detailed so far is 75, and many of the patients had
other health conditions. Coronaviruses are common, and in fact cause a hefty chunk of
common colds. They take their name from the crown-like structures seen around their cells.
What's different about WARS, SARS and MERS is that they are all new coronaviruses that
made the leap from other animals. Each leap represents a mutation in the virus, intensifying
its impact on species that do not have any form of defense against it. Earlier epidemics such
as the Spanish flu in 1918-20 were extremely widespread, but had fatality rates below 1% of
people infected. Recent outbreaks such as SARS and MERS are far more concentrated but
far deadlier, killing 10% to 20% of those who catch them.
SARS jumped from bats and likely into civet cats, then probably into people who butchered
civet cats and got blood or other fluids into their own fluids. MERS leapt from bats to
camels, and then on to humans who kept close contact with belching, spitting camels. WARS
probably also came from bats - they've lived unharmed with these viruses for centuries --
then morphed into a form that infected another animal, the best guesses so far being
snakes, bamboo rats or badgers. Butchers at a "wet market" serving freshly slaughtered
meat in Wuhan may then have got it into their bloodstream somehow, and passed it on.
Nomura notes that hedge funds have used WARS as a good excuse to take profits. That has
been most prominent in Asian equity futures, particularly the Hang Seng. But U.S. investors
should not treat the disease lightly. "Breezy bullishness looks like a bad idea at this point,"
the Japanese bank says in a research note, "as the situation looks primed for an overdone
selloff in response to even small fluctuations in the market."