As the first case of the Wuhan coronavirus was reported in the United States on Tuesday, market analysts said the outbreak could be a potential “black swan” event that, if not contained, would weigh on the Chinese economy, particularly retail sales, tourism and travel in the first quarter and early second quarter of this year.
Timothy Moe, chief Asia-Pacific equity strategist at Goldman Sachs, said the world is a “much more connected place” than it was during the severe acute respiratory syndrome (Sars) epidemic in 2003, so there’s more vectors of potential transmission than in the past and markets have responded to the potential downside risk in recent days.
“What makes this concerning and hard to handicap is that nobody really knows exactly how this is going to turn out, which really is why it’s that proverbial black swan,” Moe said. “There certainly are reasons to be concerned, just citing the already published facts, which is that it’s now seen to be communicable between humans. We’ve seen how these things can propagate.
“There’s a concern that this is coming just before the Chinese New Year when you tend to get very significant amounts of migration within China and also between China and other areas.”
The outbreak has emerged at the height of the Lunar New Year travel season where some 3 billion trips are expected to be made by Chinese residents over the 40-day holiday period, which runs to mid-February.
The virus, which is believed to have had its first transmissions at a wholesale seafood market in Wuhan, has sickened more than 400 people and resulted in nine deaths. It has also spread to half a dozen other countries and territories, including the United States. Wuhan is a major transport hub in Hubei province, where all of the deaths from the coronavirus have occurred.
Hong Kong has reported more than 100 suspected cases, including 88 people who have been discharged from hospital.
Health officials in the United States, Singapore and other countries are stepping up screening of passengers travelling from Wuhan as they seek to curtail the spread of the virus.
Swiss bank UBS said the outbreak could present some downside risk to its economic growth forecast for the mainland, but Beijing would likely engage in additional policy easing to offset any shock from the virus, particularly to affected sectors, such as hotels and retailers. Measures are likely to include the People’s Bank of China keeping interbank liquidity “ample” and guiding down market interest rates in that scenario.
“History does not repeat itself, but it rhymes. More importantly, China has learnt lessons from Sars. The government is now working much more proactively and transparently to contain the Wuhan pneumonia than [it did with] Sars, and China’s public health system is now more experienced than before as well,” Wang Tao, head of Asia economic research and chief China economist in UBS’s investment bank, wrote in a research note on Wednesday.
The viral outbreak has echoed back to Sars, which afflicted more than 8,000 people worldwide and killed 299 people in Hong Kong in 2003.
Sars cut into retail spending, as well as hotels, airlines and travel-related businesses as tourists and business travellers avoided Hong Kong. It also changed the way people conducted their daily lives as they stayed away from restaurants and public places, avoided pushing the buttons on lifts and prominently wore face masks even if they were not ill.
In its note, UBS said China’s sequential gross domestic product growth slowed sharply in the second quarter of 2003 during the Sars epidemic, mainly because of a hit to tourism and related sectors, such as transport, hotels and catering. Overall, mainland retail sales slowed from 9.2 per cent growth in the first quarter of 2003 to 6.8 per cent in the second quarter.
Beijing provided targeted fiscal policy support for affected sectors in 2003, including waiving some fees for tourism and transport, UBS said. It also had accommodative monetary and credit policy at the time.
Fears about the Wuhan outbreak have already cut into markets this week, with the Hang Seng Index falling below 28,000 in early trading on Wednesday.
Wendy Liu, China strategist in UBS’s investment bank, said it expects hotel operators with nationwide operations to be “significantly affected” depending on the spread of the virus, noting they are already trading below the 2003 trough valuation.
“Our consumer/internet team believes consumers may prefer to stay at home and forgo crowded public venues, cutting near-term travel plans. Thus, retailing, parks and movie theatres, which would normally benefit from Chinese New Year due to seasonality, could see downside,” she said. “Furthermore, on-premises alcohol consumption is likely to be negatively affected.”
Food deliveries, video streaming services and e-commerce could marginally benefit in the near term, she said.
Kinger Lau, Goldman’s chief China equity strategist, said the rise of e-commerce in China could potentially offset the affect of a widening outbreak on consumption in the mainland economy.
“The consumption pattern in China has changed quite dramatically over the past 20 years. Definitely, people travel more, but a lot more consumption activities are now being conducted online,” Lau said. “You don’t really have to go out to spend money. You can just do it online.”
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