How Wuhan Affects Our Economy
Wuhan , also known as “Chicago of the East”, is the capital city of Hubei Province in Central China. It has a population of 11 million, a GDP of USD224bil, and as many as 230 Fortune Global 500 firms have a presence there.
It is a transportation hub, a manufacturing hub, and a financial and commercial hub all rolled into one. Where industrial activities are concerned, it is big in automotive and oil & gas.
Just as the 2011 flood in Bangkok and the nuclear power station mishap in Fukushima affected the global manufacturing supply chain negatively, the current novel coronavirus epidemic will likewise disrupt the global supply chain due to the prolonged shutdown of manufacturing facilities there. The effect of this epidemic, coupled with the 25% tariff placed on the $200bil worth of Chinese exports to the US under the US/Chinese 1st phase trade agreement, can be expected to affect Malaysia in the following manner:
- Many Chinese companies may be put out of business, and as a result of that, Malaysian exports to China may be greatly reduced. This is significant as exports to China constitute 14% of the country’s total gross exports, and Malaysian imports from China make up nearly 21% of the country’s total gross imports
- The curtailing of travel and manufacturing activities has reduced the demand for oil. Consequently, the price of crude oil has plunged more than 20% to below $50 per barrel since the onset of the epidemic. A low oil price will impact oil-producing Malaysia negatively in terms of revenue receipt.
- The tourism industry is already negatively affected, with Chinese tourist arrivals having been curtailed, and travel from the rest of the world discouraged. This is bound to get worse in the near future. The Visit Malaysia 2020 campaign targets 30 million tourists, hoping for RM100bil in tourist receipts. This is unlikely to be achieved now that the epidemic appears to be a prolonged one. The general tendency for people throughout the world to cancel “unnecessary travel” will not help matters.
The hope has been that the epidemic will remain somewhat contained within Hubei Province. But this appears less and less to be the case now. Should the situation develop in such a way that other provinces in China get badly affected, the effect will multiply manifold.
However, there is a silver lining to this negativity for the Malaysian economy. The demand for healthcare consumables such as gloves, masks and sanitisers, for example, has spiked. This is a positive development for Malaysian manufacturers and exporters in the healthcare industries.
Further, the disruption to the global supply chain, especially in the electrical & electronics industry, will present Malaysian manufacturers with opportunities to fill the shortfalls. It is heartening to also note that the Ministry of Finance will be introducing stimulus packages to pump prime the economy. It will be especially important that the government pushes forward with major infrastructure projects to sharpen the country’s competitive edge. Major construction projects will also have wide-ranging multiplier effects on the local economy.
The year 2020 will be an extraordinary year, and it calls for extraordinary initiatives from everyone involved.
Dato’ Seri Lee Kah Choon is Special Investment Advisor to the Chief Minister of Penang. He is currently Chairman of Malaysia Debt Ventures, Malaysia’s leading technology financier under the Ministry of Finance, and a board member of various private companies and state government-linked corporations.