When China sneezes, the whole world catches the flu
When I first saw the headlines I looked at the total infections, total deaths and didn't worry too much. Then I realized we are dealing with Chinese data. Chinese economic data has always been viewed with a heavy dose of skepticism and I don't think their healthcare data should be treated any differently.
The number of cases reported outside of China suggest that the rate of infection domestically is much higher. International infection rates (mostly tied to Wuhan) now represent 4% of the reported total there. The mayor of Wuhan reported that 5 million residents left for the lunar holiday. Take the total number of international cases (30 and rising) as a percentage of total travelers and you can get a basic estimate of how widespread the disease is going to be. This is a very important distinction between past outbreaks (think SARS/MERS). The last time China faced a similar problem, they were much poorer and much less mobile. Since then, China has spent trillions building a national transportation network which includes airports, thousands of miles of new roads and a high speed rail network (Figure 1). Wuhan is connected to every major Chinese city by high speed rail, air and road. This drastically expands the ability of the virus to spread to other regions. Wuhan residents have become unknowing pollinators. There is a very real risk that this may not be contained.
Secondly the death rate is also likely higher than what is being reported. The deaths that have been reported are almost exclusively from Wuhan (you can see 52 of 56 are from there). Within Wuhan, where the outbreak began (and has had the longest to progress) the death rate is approaching 5% (still lower than SARS and MUCH lower than MERS), again if you trust the data (Figure 2). This is twice the level that was initially reported. This is likely because the disease just broke out and it take several weeks before the virus becomes fatal (Figure 3).
The relatively drastic measures taken by China suggest the problem is much worse than the data reflects. You don't lock down entire cities, sever transportation networks, build 1000 person hospitals, bring in the military and generally ban external tourism if things are under control. China almost always tries to project confidence and control from the top. The tone from Beijing has been much more worrisome. Even Global Times, China's state propaganda platform, used the phrase "epidemic" last week which was what initially caught my attention. North Korea also banned Chinese tourists. These are big red flags if you are reading between the lines. We're also just starting to see the first wave of cases outside of Wuhan. There are now 4 cities with close to 100 confirmed cases (Figure 2) and the total is now over 2000 (Figure 4). The incubation period is 14 days per the CDC. This likely has at least another week to run with exponential growth.
All of this is meant to sound alarmist because there are many who are discounting the risks. If you ask any public health official what type of disease worries them the most, they would highlight a few factors: viral, airborne, and the ability to be contagious without showing symptoms. This one checks all three. I am trying to strike a fine balance between saying Chinese data is drastically understating the problem while acknowledging it's entirely possible it's a controllable problem. It's a real risk. Not something an investor should discount.
Now that people are aware of the risks, they will take precautionary measures such as wearing facemasks, washing their hands regularly and travelling less. This will help a lot. Ro will drop. The real question, which I cannot answer is how big has the outbreak already gotten? At the moment it's already spread across the entire country but perhaps there are only a few cases like we have seen internationally that can be contained. If we end up with a dozen or so pockets of 100+ infections, it's going to be harder to control (even more if it gains a foothold outside of China).
Economic implications are pretty clear. Lower retail sales, home construction, fuel consumption. The lunar new year increases the risks of the virus spreading but it's also a holiday for many so in some ways the industrial and supply chain impacts are muted. If it keeps spreading, prevention efforts are going to get more intense and it's going to have a more meaningful impact on growth. The responses are similar to what they were a hundred years ago during the Spanish flu (Figure 5). Moreover, the better the control measures (curfews/travel bans/restrictions on public gatherings/limiting public transportation), the bigger the hit to growth. There are no easy choices. Watch closely.
Again, just watch closely.
Lastly, I will leave you with my biggest worry. This will be devastating for the global poor if China cannot contain it. A third of the globe lives in slums. They are not prepared for this. If China is not able to contain the outbreak EM will suffer the most. If this reaches Delhi or Lagos, it’s going to become a much more difficult situation.
Additional links
1) Good general introduction
2) Live data on confirmed cases/deaths
Figure 1: Wuhan is connected to every major Chinese city by high speed rail
Figure 2: Cases are all over China, but the death toll only reflects Wuhan. In Wuhan it is now over 5%.
Figure 3: New infections in other cities haven’t had enough time to be fatal.
Figure 4:: New cases have grown at an exponential rate. Recent measures will help slow contagion but it’s likely already bigger than the SARS outbreak.
Figure 5: Responses are the same today as they were 100 years ago during the Spanish flu outbreak