China economy may be further hit by virus outbreak

  • Economy
  • Monday, 27 Jan 2020

China Economy Peck

WILL the green shoots of stabilisation wilt in the wake of growing concerns over the spread of the China coronavirus?

With an extended travel ban, and numbers of those affected increasing by the day, the worry is that this slowdown in activities especially during the Lunar New Year, will lower Chinese consumption and growth.

Already at a 30-year low, Chinese economic growth at 6.1% last year could be further hit, affecting the stability of the region.

While long-term investors wait out the contagion which Chinese authorities are struggling to contain, the fear is that this time round, the economy may be worse hit than during the 2003 outbreak of the severe acute respiratory syndrome (SARS).

Sectors like tourism now play a bigger part in China’s GDP, accounting for 5% compared with 2% in 2003, Commerzbank analyst Hao Zhou was quoted as saying by CNN.

The services sector which now contributes 52% to China’s economy, will be affected as consumers avoid going out; in Wuhan, the transport and industrial hub of central China and home to 11 million people, this will have a big impact on spending.

If spending on items such as discretionary transport and entertainment contract by 10%, overall GDP growth will fall by 1.2 percentage points, estimated S&P Global Ratings Asia-Pacific chief economist Shaun Roache.

Hong Kong and Beijing already cancelled planned activities for the Lunar New Year holidays.

Hong Kong, still reeling from ongoing protests, has declared the situation an emergency and closed its schools for two weeks.

Industries exposed to activities that take place outside the home are likely to be hit, as other major cities are also reporting on infected cases.

Generally, such events are likely to have a short-lived impact on growth; they are unlikely to evolve into a major crisis that would tip the world into a recession, said RHB Research Institute chief Asean economist Peck Boon Soon.

The timing of this virus outbreak couid not be worse; following a major rollout of stimulus measures, China’s economy was trying to stabilise after its year long trade fight over US tariffs.

Chinese retail sales grew at 8%, year-on-year, in December, which was above expectations for 7.8% although it was unchanged from the five-month high in November.

Industrial production in China rose 6.9%, year-on-year, in December, from 6.2% in November, beating expectations for 5.9%.

It looks like some, hopefully not all, of the positive impact from the minor achievement of a Phase One deal between China and the US may be derailed by this virus outbreak.

The world is closely watching if Chinese authorities, armed with more experience, can succeed in controlling this outbreak.

The SARS epidemic of November 2002 to July 2003, had killed 774 people worldwide, and infected 8,098 while costing the world economy some US$40 billion.

It now appears serious enough to be a danger to China and other countries due to the curtailment of travel, said Inter-Pacific Securities head of research Pong Teng Siew.

Instead of 400 million travellers expected over the Lunar New Year, flights and hotels are being cancelled.

A sustained period of coronavirus will dent confidence and disrupt travel and tourism; China cannot afford an epidemic that can disrupt its economy, said Socio Economic Research Centre executive director Lee Heng Guie.

The global economy does not need a major non-economic risk, as it struggles to regain some footing in terms of confidence and increased trade.

German manufacturing, while still shrinking, reached a five month high to 51.1 in January, beating expectations for 50.5, according to IHS Markit’s composite purchasing managers’ index (PMI).

Amidst easing in trade tensions, European Central Bank president Christine Lagarde saw a ‘somewhat less pronounced risk’ to the region.

In Malaysia, some early signs of possible turnaround are seen in November 2019 industrial production registering the strongest yearly increase since June, of 2.0% year-on-year.Manufacturing in Malaysia, as indicated by IHS Markit’s PMI, hit 49.5 in November, the third successive month of gains and the highest since September 2018.

Business sentiment has improved among large firms in Malaysia, according to a survey conducted by Monash University Malaysia and CPA Australia.

If this outbreak turns out to be a pandemic, which is an epidemic of worldwide proportions, investors are likely to switch to cautious defensive plays as economic and social activities would be disrupted.

Some sectors that may benefit financially include pharmaceuticals, health and life protection, medical equipment and glove production, said Areca Capital CEO Danny Wong.

Malaysian glove makers are ready to increase production; during the 2009 H1N1 flu outbreak, consumption of medical gloves had surged by 17%.

Vigilance is the word all round.

Columnist Yap Leng Kuen prays for effective control. The views expressed here are the writer’s own.

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