The fast-spreading new strain of coronavirus is reminding Middle Eastern and other economies just how much they rely on China for business as human activity across the country of 1.3 billion shuts down while authorities race to contain the outbreak.

Oil prices have already been depressed for months, weighed down by buoyant American supply and internecine trade wars. China’s new coronavirus epidemic, which has killed more than 600 people and sickened more than 31,000, threatens to plunge the commodity — the lifeblood of many Middle Eastern economies — to further lows.

Oil demand from China — a top buyer of crude from Gulf states — is “significantly down” and consumption has fallen around 20%, or around 3 million barrels per day, according to Andy Lipow, president of Lipow Oil Associates.

“Any extended period of time where we see this decline in demand is really going to further pressure the oil market,” he told CNBC Wednesday.

The ongoing coronavirus outbreak is speeding up the so-called “decoupling” between the U.S. and China more than their trade war did, according to an analyst from the Milken Institute.

“We talked about China and the U.S. decoupling. The coronavirus more than the trade war has sped some of that decoupling as countries, as businesses think about their supply chain for the long run,” said Curtis Chin, an Asia fellow at the Milken Institute, calling it an “increased disengagement” of both economies.

“It can’t all be in China, we’ve seen some of the consequences of over reliance on just one key market,” he told CNBC at the Milken Institute’s Middle East and Africa Summit in Abu Dhabi on Tuesday.

Talk of the risk of the world’s two major powers “decoupling” surfaced as their trade battle, which began in 2018, heated up — leading to billions of dollars of tariffs imposed on each other’s goods. Sticky issues also included the U.S. accusing China of intellectual property theft and forced technology transfer.

Last year, the White House reportedly considered some curbs on U.S. investments in China such as delisting Chinese stocks in the U.S. In the arena of technology, ties between the countries also steadily worsened, and China was said to start efforts to wean itself off U.S. tech.

Chin said: “The reality is that the US and Chinese economies, from supply chains to investment and trade flows, will be intertwined for years to come. The coronavirus crisis, however, has underscored to the United States and all of China’s trading and investment partners the value of diversification away from China.”

Nomura in a note on Tuesday flagged China’s deep integration with the global economy — the Asian giant contributed to 12% of global trade last year. The supply chains of many companies, including U.S. businesses, are heavily dependent on manufacturing in China.

The U.S.-China trade war and its tariffs have hit some Asian economies as companies to scrambled to avoid duties, diverting trade flows. But there have also been winners.

The outbreak, which began in Wuhan, China, has once again upended supply chains, as Chinese cities go into lockdown, restricting transportation and shuttering factories for longer than originally planned.

For instance, many automakers have been temporarily forced to shut down their plants in China due to the containment efforts to curb the outbreak. Apple’s biggest supplier Foxconn, has reportedly not yet fully resumed production at its factories in China as well, and analysts predicted a cut in iPhone shipment forecasts.

U.S. Secretary of Commerce Wilbur Ross even said that the deadly outbreak in China could be good for America. He said that it would lead businesses to reconsider their supply chains — and return jobs and manufacturing to the U.S.

I think it will help to accelerate the return of jobs to North America,” he said in late January. “Some to the U.S., some to Mexico as well.”

One effect of the ongoing outbreak, though, is that it’s giving both powers “an out” for the so-called phase one agreement that they just signed, Chin pointed out.

“In many ways, things are frozen right now — that U.S.-China trade dynamic. I don’t see negotiators coming from Beijing to Washington at this moment,” he said.

“Interestingly, when we think about the phase one deal … in a way the coronavirus gives both sides an out. If commitments aren’t met anytime soon, well it’s the coronavirus,” Chin added.

Both countries signed a partial trade deal on Jan. 15 which included a huge commitment by China to buy at least $200 billion worth of U.S. goods over two years. That includes manufactured goods, food, agricultural, energy products and services.

By Weizhen Tan
CNBC

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