Update – Coronavirus outbreak – including risk management,  supply chain disruption and business winners & losers.

Introduction

The outbreak of New Coronary Virus 2019-nCoV, colloquially known as Coronavirus, in the central Chinese city of Wuhan in Hubei Province, prompted an unprecedented Chinese and international response to an epidemic.

As Wuhan and other local cities across Hubei Province went into lock-down around the Chinese New Year period, the human cost of the virus has, regrettably, been well documented. As businesses look to the first working week of the new Lunar Year, what remains unclear, is the full extent to which the virus will impact productivity, supply chains and Chinaʼs and the global economy.

The second outbreak of a SARS-type virus in China in twenty years, much of the analysis supporting business has sought to focus on the impact that the 2002-3 SARS outbreak had on Chinaʼs economy. Seventeen years later, China plays a far more prominent role in global trade and international supply chains. Quarantined towns, closed factories, reduced air routes and travel warnings will influence global supply chains in a way which the previous outbreak never did.

Which Cities / Manufacturing Areas Have Been Affected?

  • Hangzhou
  • Nanjing
  • Ningbo
  • Taizhou
  • Wenzhou
  • Wuhan
  • Yiwu

*All of the above cities are either in full lock-down or have semi-lock down restrictions in place

Anticipated Economic Impact

Analysts anticipate that the Coronavirus will knock Chinese growth from 6.4% to 5.5% over the course of 2020.

Investor confidence in Chinese stocks has fallen dramatically; the benchmark Shanghai Composite Index fell 8.7% as trading opened earlier this week for the first working day of the new Lunar Year. The Shenzhen Composite Index was off 9.1%, and dangerously close to hitting the permitted fall of 10% where trading is suspended.

In FX Trading, the Chinese Renminbi fell through the seven-to-the-US-Dollar mark for the second time since December 2019. Given the increased prominence of China in the global economy, there are fears of a global slowdown. Considering the fact that Chinaʼs economy is nearly four times larger relative to the global economy in 2002 and scaling up the damage SARS had on the global economy, analysts anticipate a global GDP negative impact of 1.8% to 6%.

Supply Chain Disruption

  • Most employees will not return to work before 10th Large output losses are expected as a result
  • Businesses should anticipate that productivity in China will continue to be around 20% lower than normal
  • It is likely that many companies in the Peopleʼs Republic of China will be unable to perform their contractual obligations on CBI Members with Chinese partners in their supply chains should seek legal advice to gauge whether such failure of duly performing contractual obligations leads to a breach of contract and respective liabilities or whether such liabilities may be exempted under the legal concept of Force Majeure.

Force Majeure

Article 180 of the General Rules of the Civil Law of the PRC, Article 153 of the General Principles of the Civil Law of the PRC and Article 117 of the PRC Contract Law, rather generally, define Force Majeure as “objective circumstances which are unforeseeable, unavoidable and insurmountable”.

  • The consensus among member law firms on the ground in China is that: “the 2019nCoV outbreak and respective governmental measures, such as instructions to extent public holidays, to close businesses, etc., can indeed constitute Force Majeure. However, each case must be checked individually and if affected contracts include relevant stipulations on Force Majeure, these stipulations must be checked carefully and in detail.” CMS

To read CMS Lawʼs briefing on Force Majeure in full, please follow the link.

Endgame Scenarios

It is anticipated that the Coronavirus public health emergency in China will be under control by the end of March 2020.

Scenario Date by when the 2019-nCoV outbreak comes under control within China Probability Chinaʼs revised real GDP growth, 2020 (%)
Optimistic End of February 25% 5.7
Baseline End of March 50% 5.4
Pessimistic End of June 20% 4.5
Nightmare The outbreak is not contained in China by the end of 2020 5% <4.5

*Data drawn from the Economics Intelligence Unit, “Coronavirus Outbreak – Economic & Business Implications”, Feb. 3rd, 2020

The Winners

  • Pharmaceuticals
    • Companies will see increased demand for vaccines and antibiotics
  • E-Commerce
    • Consumers will shun bricks-and-mortar stores in fear of infection
  • Online Entertainment
    • Stuck indoors, consumers spending on internet services will spike
  • Insurance
    • Will taking a short-term hit, will benefit in the long-term from increased awareness

The Losers

  • Travel & Tourism
    • Will be the hardest hit owing to quarantine restrictions and reduced consumer spending
  • Logistics
    • Will see distribution interrupted by quarantine measures and face a lack of delivery staff
  • Manufacturing
    • Is just one labour intensive sector that will be hard hit
  • Luxury Goods
    • Spending will drop as consumers limit purchases to essential items

Virus Control and Prevention

Fact File:

Source of infection: Wild animals Virus: New Coronary Virus 2019-nCoV

Route of transmission: Respiratory droplets as well as person-to-person contact

Whoʼs at risk: It is currently best to err on the side of caution as everyone is considered at risk. The elderly and infants are at highest risk

Incubation period: 3 to 7 days; up to a maximum of 14 days

Key prevention procedures

  • Wash your hands often with water and soap for at least 20 If soap and water are not available, use an alcohol-based hand sanitiser
  • Avoid touching your eyes, nose, and mouth with unwashed
  • Avoid close contact with people who are sick
  • Cover your cough or sneeze with a tissue, then throw the tissue in the
  • Clean and disinfect frequently touched objects and surfaces

Additional Resources

Travel Advice:

Foreign & Commonwealth Office, Travel Advice: China. Current as of February 6, 2020, accessible at: https://www.gov.uk/foreign-travel-advice/china

Legal Briefings:

CMS Law, “Coronavirus Outbreak: Follow-up Updated Policies on Treatment of Employees,” February 5, 2020, accessible at: https://cms.law/en/chn/publication/coronavirus-outbreak-follow-up-updated-policies- on-the-treatment-of-employees

Eversheds Sutherland, “Fighting the Coronavirus: Key Legal Challenges and Solutions,” February 3, 2020, accessible at: https://www.evershedssutherland.com/global/en/what/articles/index.page?ArticleID=en/Energy/ Fighting_the_ Coronavirus-_a_cautioned_approach

Analysis:

Dan Harris, “Whatʼs Going to Happen with My China-Dependant Supply Chain?” ChinaLawBlog, February 2, 2020, accessible at: https://www.chinalawblog.com/2020/02/whats-going-to-happen-with my-china-dependent-supply-chain.html

James Palmer, “China is Under Lockdown,” Foreign Policy, February 5, 2020, accessible at: https://foreignpolicy.com/2020/02/05/china-lockdown-wuhan-coronavirus-government-propaganda-xi- jinping/

We are very grateful for this information from the CBI (www.cbi.org.uk)

Leave a Reply