Coronavirus fears have become the dominant the driver of markets, threatening Chinese and Asian growth and fueling a rise in market volatility. Global equities have largely bounced back since the initial shock waves, but vulnerability remains as the virus continues to spread (latest count 40,514 confirmed, 910 deaths) and the number of cases continues to rise. China helped sentiment by injecting substantial liquidity into its markets (CNY 150bn in liquidity via 7-day and 14-day reverse repos, while cutting the rate on both by 10bp) but the economic impact continues to deepen.
Today is important for China’s industry. Many companies open up after a prolonged Lunar New Year holiday though many are likely to remain closed. The Financial Times reports that many are extending further, with for example Alibaba and Meituan extending to Feb 16 at the earliest. Foxconn is reportedly not going to resume iPhone production in Zhengzhou, while some regions have told employers in hard hit cities to extend by a week or two. This suggests that the economic hit is going to be harder in Q1 and for the full year.
The extent of economic damage is clearly not easy to gauge at this stage. What we know is that the quarantine measures, travel restrictions and business shutdowns have been extensive and while these may limit the spread of the virus, the immediate economic impact may be significant. While transport and retail sectors have fared badly, output/production is increasingly being affected. This may result in a more severe impact than SARS, at least in the current quarter (potentially dropping to around 4-4.5% y/y or lower, from 6% y/y in Q4 2019).
China’s economy is far larger and more integrated into global supply chains than it was during SARS in 2003, suggesting that the global impact could be deeper this time, especially if the economic damage widens from services to production within China. Worryingly, China’s economy is also in a more fragile state than it was in 2003, with growth already on track to slow this year (as compared to 10% GDP growth in 2003 and acceleration in the years after).
This does not bode well for Asia. Asia will be impacted via supply chains, tourism and oil prices. The first will be particularly negative for manufacturers in the region, that are exposed to China’s supply chains, with Korea, Japan and Taiwan relatively more exposed. Weakness in tourism will likely be more negative for Hong Kong, Thailand and Singapore. Growth worries have pressured oil prices lower and this may be a silver lining, especially for big oil importers such as India.