China virus risk outlook:
Chinese and global economies bracing for short-term impact. By Fitch Solutions
China’s services sector, which accounts for more than 60% of the country’s economy, is expected to be negatively affected by the current coronavirus outbreak, posing downside risks to our forecast of 5.9% real GDP growth in 2020.
While the authorities are better prepared to handle an epidemic compared to the early 2000s when severe acute respiratory syndrome (Sars) struck, more stringent controls and greater public awareness of the risks are likely to lead to a decline in tourism.
While we do not rule out negative shocks to Chinese financial markets in the short term, any impact is likely to be mild and short-lived. Indeed, the yuan and Chinese equities proved mostly resilient during the Sars epidemic.
However, the outbreak poses a downside risk to the broader global economy even if the disease does not spread more widely, given the fact that China’s share of global GDP has quadrupled since 2002.
According to the National Health Commission (NHC), the 2019 Novel Coronavirus (2019nCoV) has infected at least 5,974 people and killed 132 in China as of Jan 28, with the cases mostly concentrated in Wuhan, since coming to light on Dec 31.
More infections are likely, and the minister in charge of the NHS, Ma Xiaowei, said on Jan 26 the virus could be spreading while in incubation, which could last up to two weeks.
This is untimely given the typical 40-day travel season associated with the Chinese New Year festivities, which poses the risk of the disease spreading more widely. However, reports of widespread trip cancellations should limit exposure somewhat.
At its peak, Sars (also a coronavirus), infected more than 5,000 people in China in 2003. The epidemic was more or less contained by July 2003, however, and the number of patients started to decline slowly from then on.
BETTER PREPARED
The rapid rise in the number of 2019-nCoV infections makes it likely the virus will infect more people in China than Sars did 17 years ago, though the current death toll suggests a lower mortality rate. That said, Chinese authorities’ response has been faster, more decisive and open this time around.
During the Sars outbreak, despite initial openness, local government officials played down the risk and suggested the “mystery threat” was contained. Today, the healthcare system and hospitals are far better prepared, with improved surveillance systems, medication and state-of-the-art medical facilities.
Moreover, in the past month Chinese authorities have been prompt in providing timely global alerts, identifying cases, sequencing the genome of the pathogen and releasing it to the scientific community.
While we believe 2019-nCoV will likely be better managed by the Chinese authorities and is likely to prove less of a public health threat, we still see downside risks to the economy.
Specifically, the very presence of a significant and, more importantly, new health threat for which a vaccine is at least a few months away, is likely to prove a deterrent to visitors, both for business and pleasure.
Consequently, the services industry as a whole is likely to be negatively affected. A hit now to the tertiary sector (which is dominated by services) would be a hit to China’s key growth engine amid a slowdown marked by GDP growth in 2019 of just 6.1%, the slowest in more than 30 years.
The tertiary sector has consistently outperformed the primary and secondary sectors since the third quarter of 2012, an indication of the progress China has made in rebalancing the economy towards services and consumption.
Retail and services made up 62% of the economy in 2019, compared with just 52% in 2002 before the outbreak of Sars. Therefore, downside risks to the services sector will likely prove a bigger drag on the economy this time around.
To be sure, there was a comparatively sharp decline in the number of inbound tourists and tourism earnings in 2003. Tourist arrivals declined 6.4% in 2003, compared with average growth of 10.4% over the three years prior. Earnings saw a sharper fall of 14.6%, reversing average expansion of 13.1% in the previous three years.
CANCELLED TRIPS
China is likely to see a similar, if not greater decline in tourism this time around, precisely because of the more stringent controls that authorities will continue to adopt, as well as greater public awareness, which we believe will lead to precautionary cancellations of planned trips.
Where the markets are concerned, we do not rule out short-term negative shocks to the yuan and Chinese equities, but do not expect a collapse or prolonged slump.
In fact, the yuan (which was not a free-floating currency in 2003) remained mostly steady at the height of the Sars epidemic in 2003, trading tightly between 8.27 and 8.28 to the dollar throughout the year.
Foreign exchange reserves likewise appeared resilient, indicating that China did not have to expend significant amounts of reserves to defend the yuan during that period. Indeed, reserves rose from around US$300 billion in January 2003 to about $400 billion by December 2003.
Equities, however, took a tumble in 2003 but recovered towards the end of the year. The difference between the peak in May 2003 when the ShanghaiShenzhen Composite Index averaged 1,261.3 and the trough of 1,119.1 in November 2003 was 12.7%.
China’s share of global GDP was 16.5% in 2019, compared with just 4.6% in 2002 and 2003, meaning the outbreak will likely have a greater impact on the global economy even if the virus is mostly contained within China.
However, as with China, the impact on Asian financial markets and currencies could prove short-lived, if the Sars experience proves instructive. The Asia currency index (ADXY) declined by only about 2% in May 2003, after large outbreaks of Sars in Singapore and Hong Kong. The index went on to post a strong recovery through to 2004.
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While we do not rule out negative shocks to Chinese financial markets in the short term, any impact is likely to be mild and short-lived.