Coronavirus impact on Chinese economy to be greater than Sars, Moody's says

Beijing may opt for more fiscal and monetary policy intervention to support the Chinese economy if needed

Workers set up beds at an exhibition centre that was converted into a hospital in Wuhan, in China's central Hubei province, the epicentre of virus outbreak. AFP

The Wuhan coronavirus, which could be declared a pandemic, will curb consumer spending in China, impacting the world's second largest economy more than the 2003 Sars epidemic, according to Moody’s Investors Service.

The outbreak of the virus will dent spending on transportation, retail, tourism and entertainment, the agency said, adding that downside risks to its 5.8 per cent 2020 economic growth forecast for China are rising.

"The fact that the epidemic broke out just ahead of the Lunar New Year, a period of very high seasonal consumption and travel, will exacerbate the economic impact," said Martin Petch, a Moody's vice president and senior credit officer. "When compared to the 2003 SARS outbreak …. the now much-increased contribution of consumer demand as a driver of growth means that the coronavirus outbreak could have a greater economic impact."

There will likely be a marked drop in revenue across China for several months to come. However, both the central government and regional and local governments have the financial muscle to absorb the subsequent economic and fiscal shock, Moody’s said.

Stocks in China dropped about 8 per cent on February 2 when trading resumed after the end of extended Lunar New Year holiday. It was the worst drop since 2015 when a massive selloff wiped out $3 trillion (Dh11tn) from the stock exchange. The government on Monday injected 1.2tn renminbi (Dh635 billion) into financial markets in a bid to support the economy. Beijing also lowered interest rates on reverse repurchase agreements by 10 basis points.

Stocks regained some lost territory on Tuesday with the Shanghai composite edging up 1.34 per cent while the Shenzhen component gained 3.17 per cent. Hong Kong’s Hang Seng index was 1.21 per cent higher.

The Sars outbreak caused China's GDP growth and financial asset valuations to drop significantly, but only for a short period. However, the country's growth composition has since changed markedly. The amplified role of consumer demand means reverberation of the latest outbreak would be more intense, he noted.

Stephane Monier, chief investment officer at Lombard Odier, agreed. The “historical comparison may be misleading,” he said, adding the coronavirus' short-term impact on the Chinese economy in the first quarter will be “severe”.

China’s share of the world economy has also multiplied since the early 2000s and an impact on Chinese economy will have repercussions for the global economy. The country currently accounts for 17 per cent of global GDP and 13 per cent of global trade against 4 per cent and 5 per cent, respectively, in 2003.

China also contributes nearly 70 per cent of global demand for metals, almost three times higher than 2003, as well as 20 per cent of aggregate global tourism spending, against just 3 per cent 17 years ago.

“The immediate impact will be impact on travel, which will hurt economies such as Hong Kong, Thailand and Vietnam, which rely on Chinese tourists,” Mr Monier noted.

The latest strain of coronavirus, which has its epicentre in the Chinese city of Wuhan, has claimed 425 lives and infected more than 20,000 people as of Tuesday.

Both Moody’s and Lombard Odier said Beijing is likely to opt for more fiscal and monetary policy intervention if needed.

“While these measures can help confidence, they are unlikely to prevent a slowdown in the first three months of the year,” Mr Monier said in a note to investors. “If needed, the authorities could signal more proactive fiscal spending when the National People’s Congress meets in March.”

Moody’s said the effectiveness of policy easing is unclear at this point. Given the high levels of uncertainty, consumers may simply spend more cautiously in general.

“Reflecting this, Moody's will maintain its current forecast for GDP growth in 2020, but will monitor and potentially amend its expectations as developments provide more clarity,” the agency added.