China economy to take heavy beating in Q1 from virus outbreak

Nurluqman Suratman

11-Feb-2020

SINGAPORE (ICIS)–China is expected to take a heavy beating in the first quarter from the ongoing coronavirus outbreak, which severely hampered travel and business activities in the world’s second-biggest economy.

With various levels of lockdown currently enforced in most provinces, and numerous roadblocks, travel restrictions, and bans on the reopening of factories, offices and shops in place, a high number of people who traveled back to their hometowns during the Lunar New Year holidays could not return to their work sites.

China’s first-quarter “economic growth could come in lower than 4.0% if the spread of the coronavirus continue to rise significantly, resulting in lockdowns of even more cities than we expect”, research firm Fitch Solutions said in a note on Tuesday.

The forecast represents a sharp slowdown from the actual 6.4% growth posted in the first quarter of 2019.

For the whole of 2020, Fitch has revised down its forecast for China’s real GDP growth to 5.6% in 2020, from 5.9% previously.

The death toll from the novel coronavirus (2019-nCoV) outbreak in China  has reached 1,107, with 42,170 infected as of 11 February.

The outbreak is believed to have originated in Wuhan, the capital of Hubei province in central China.

In a bid to contain the coronavirus, at least 88 cities in China have been put on complete or partial lockdown, including some of the largest and economically important cities, according to Fitch.

The number of cities put under lockdown has been climbing, and several businesses, including major Japanese car makers Toyota and Honda, suspending operations in China.

While some of these businesses have put an end date to their temporary closures, an unabated spread of the coronavirus could easily see them extending their suspensions.

Japan’s Nomura Global Markets & Research formulated the Baidu Migration Index (BMI) and the Gaode Congestion Index (GCI) to track the rate of businesses re-opening in China, based on two Chinese travel data platforms.

The BMI tracks the rate of workers travelling back into the main cities while the CGI tracks the traffic flows in major cosmopolitan areas.

Recent data indicates the rate of people travelling back from their hometowns to work has dropped dramatically compared to the previous year.

“By examining the BMI and GCI, we conclude that the NCP had a devastating impact on China’s economy in January and February, and could extend well into March owing to the present low return rate,” it said.

The cumulative return rate for China’s four “Tier-1” cities – Beijing, Shanghai, Guangzhou and Shenzhen – was only 19.4% as of the 16th day of the Lunar New Year (9 February ), far below 66.7% a year ago, according to the research firm.

The major shock of the coronavirus outbreak, should it last for another a couple of months, could lead to much more significant disruptions for a longer period, it said.

Some economic entities may not be able to survive and thus end up having to declare bankruptcy.

“This would result in rising non-performing loans for banks and these entities failing to participate in the recovery,” Nomura said.

Some enterprises might be forced to lay off workers if they cannot restart business soon and could significantly cut their purchase of raw materials, resulting in a downward spiral of worsening demand, Nomura said.

“We are concerned that global markets thus far appear to be significantly underestimating the extent of disruption inflicted by the [coronavirus],” it added.

China economy represents about 16% of the global economy and makes up 12% of all global trade in 2019, based on data from global financial watchdog – the International Monetary Fund (IMF).

In Asia, the economies most vulnerable to China’s growth slowdown are Hong Kong, Singapore, Thailand and Taiwan.

Singapore exports about 10% of its refined petroleum products to China, while Taiwan has a strong exposure to China’s manufacturing supply chain.

One consequence of the coronavirus outbreak has been the heightened impetus for Asian central banks to cushion the resulting shock to regional economic activity, according to Singapore-based DBS Bank.

Since virus fears intensified in mid-January, the central banks of China, Malaysia, Thailand and Philippines have cut interest rates, while India and Indonesia have placed theirs on hold.

“China, the epicentre of the outbreak, clearly has plenty of policy room to cut rates, largely because they were conservative in easing last year. Our economists are expecting an aggressive 60bps [basis points] lowering of the loan prime rate and 300bps reduction to banks’ reserve requirement ratios this year,” it added.

China’s finance ministry recently said that it would allocate yuan (CNY) 71.9bn ($10.3bn) to support efforts to fight the coronavirus.

Thumbnail photo: A woman walks on a deserted street and wears a mask in an attempt to protect himself from a coronavirus contagion in Guangzhou, China (ALEX PLAVEVSKI/EPA-EFE/Shutterstock)

Focus article by Nurluqman Suratman

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