Wuhan virus lockdown casts cloud over industry & tech hub

Wuhan’s status as a transport and manufacturing hub have fueled its economic rise and drawn comparisons with Chicago’s role as a pivotal city in the center of a giant economy.

Now, the fallout from its lockdown to contain the spread of a new SARS-like virus is set to be amplified if logistics networks and the auto industry are interrupted across the city of about 11 million people.

“Complicated supply chains and just-in-time production could mean that production outages in Wuhan factories have broader spillover effects,” according to Shaun Roache, Asia-Pacific chief economist at S&P Global Ratings.

Wuhan had been making progress in its push to shift into higher-technology industries: In a 2019 report the Milken Institute ranked it China’s ninth best-performing city, up seven places from its previous annual report. The city was moving into areas from chip-making to biomedicine and had attracted investments from 230 Fortune Global 500 firms, according to the report.

The central and local government have invested heavily in Wuhan’s high-tech industries, especially optoelectronics and semiconductors, says Barry Naughton, a professor at the University of California at San Diego who specializes in the Chinese economy.

“For these reasons, it’s a pretty big deal,” he says. “Its economy is somewhat artificial in the sense of being propped up by government investment, but it has got a substantial high-tech sector and a substantial heavy industrial sector.”

Now the city is being closed off, as China races to halt a new virus that’s killed 25 and infected hundreds. The coronavirus, which first appeared last month in one of Wuhan’s so-called wet markets, has spread from the mainland to Hong Kong, Japan, the U.S. and other places.

Most of those who have died had other health conditions, including diabetes and heart disease, that weakened their immune systems. Symptoms include fever, cough or chest tightness, and difficulty breathing.

What Bloomberg’s Economists Say…

“With the emergence of a new virus in China rattling financial markets and disrupting Lunar New Year travels, there’s potential for a broader hit to growth—just as the economy was stabilizing.”

—Chang Shu, Chief Asia Economist

The city’s economy grew 7.8% last year and 8% in 2018, according to the city government, with output of 1.48 trillion yuan ($213 billion) making it bigger than New Zealand. S&P estimates it makes up about 1.6% of national GDP.

“If the lockdown continues after the Lunar New Year, it will affect industrial production, one of the key growth drivers” for China, according to a note from Raymond Yeung, chief China economist at chief Greater China economist at Australia & New Zealand Banking Group Ltd. in Hong Kong.

The capital of Hubei province, Wuhan is the biggest water, land and air transportation hub in inland China, according to the Ministry of Commerce. It’s also a major rail hub with multiple lines linking it to major cities, and a renowned education center. The city has 89 universities and 1.2 million university students, Mayor Zhou Xianwang said in an interview Tuesday with state television.

Wuhan is also home to one of the country’s most advanced chip fabrication plants, a complex owned by semiconductor giant Tsinghua Unigroup that makes so-called 3D NAND flash memory employed in smartphones and computers.

While it’s not a place that’s often prioritized on the itineraries of foreign visitors, it is a key stop on Yangtze river cruises. Former leader Mao Zedong brought the city to fame in the summer of 1966 when he plunged into the Yangtze to join thousands in an annual swim. Seen as signaling Mao’s rising political power, it was followed by his Cultural Revolution.

Restaurants are already taking a hit as fearful locals avoid gatherings. China-wide, if spending on things including discretionary transport and entertainment dropped by 10%, overall GDP growth would fall by about 1.2 percentage points, according to “back of the envelope” estimates from Roache at S&P.