Australian dollar’s fall a warning coronavirus crisis may last longer

A Chinese woman has her temperature checked as she enters a park in Beijing. Picture: Getty Images

When the Australian dollar hit a decade low over the weekend world markets were recognising that that we are set to be hit hard by the coronavirus fallout.

But our blows are minuscule compared to China, where community fury is so great that it may even threaten the administration of China’s President Xi Jinping.

The medical researchers say that they will not have a vaccine for four to six months, which would be catastrophic for both China and Australia.

Unlike the Australian dollar, our share market is being priced on the basis that the quarantine measures will cause the virus to recede quickly. One of the markets will be wrong.

My Chinese friends tell me that the fury among the Chinese population is white hot because most have relatives or friends among the 40 to 60 million people isolated in the Wuhan region. Food supplies may become an issue if the quarantine is maintained, partly because millions of chicken and pigs face death by starvation because insufficient feed can be brought into the Wuhan region.

The Wuhan region is best known globally as being one of the great China transport hubs.

But in China it also known as the site of the Wuhan BSL-4 biological weapon system laboratory. Many in China believe the coronavirus is part of a biological weapon system which escaped the Wuhan BSL-4 laboratory. The Chinese strongly deny this and there is no confirmation or clear evidence, but the BSL-4 rumours, plus the failure to act on the warnings of a Wuhan doctor (who has since died) and the discovery that some Wuhan residents were tipped off in December to get out of the region, swirl among the Chinese population and increase the fury.

And on Wall Street the bond buyers seeking the security of US bonds were back at the weekend, but the US share market has had a wonderful run, which has boosted Australian shares.

In Australia the industry that is in the front line is LNG exports, particularly from Queensland, where highly borrowed consortium/companies are being told by the Chinese that they will not accept contracted LNG cargo either this month or in March because the Chinese economy is virtually shut down. Accordingly there is a clear case of “force majeure”.

All listed companies involved in LNG exports to China need to fully inform the market of the situation including whether there is a threat to debt repayments. The ASX should move onto the front foot.

BHP is working with Chinese copper customers to recognise the situation and delay shipments rather than trigger a “force majeure” situation. There will be doubtless also be negotiations over iron ore which has fallen sharply in price. BHP, unlike some of the Queensland LNG players, does not have a debt problem.

The Australian federal budget is set to be hit first with much lower mineral export taxes and then increased outlays as a result of the bushfires.

But these are the big picture events. The real action is down on the ground among smaller enterprises. One can only imagine the carnage that is taking place among the countless millions of smaller Chinese traders, with the economy being virtually shut down.

In recent decades, as soon as the Chinese economy slowed the leadership would pump money into the economy rather than annoy the population. This has created a nasty debt situation in China which will be tested by the virtual shutdown to curb the virus.

The Communist Party dictatorship rules because it delivers economic rewards to the people.

The coronavirus travel and other restrictions represent the first time that extensive suffering has been imposed on the Chinese population and no one is sure just how big the backlash will become.

In Australia we are being bombarded with tragic stories from the multitude of small operations that have been hit by the sudden fall in Chinese tourists. Soon, universities will be crying out for help.

But the enormity of what is taking place really came home to me at the weekend when I was yarning with a couple who have moved into a renovated house. They are sleeping on mattresses because the bed they ordered in what seemed “plenty of time” is caught in the China quarantine. They have paid a deposit but fear the supplier of the bed may be sent to the wall by the inability to complete large numbers of orders. (The couple are considering switching to a group making beds in Australia.).

That small incident is being multiplied countless times because we have become dependent on one country for a vast array of our goods.

As the supply slows so retailers will shed staff and the vast army of trucks will stay in the garage. Australia will have a recession. That’s not a forecast, just an inevitable consequence if the current trade restrictions continue deep into March and April.

If they end in a week or two we will be looking at a blip that will soon be forgotten.

The dollar’s fall is the warning that this crisis may last longer than a week or two. The share market is the optimist.