Global Financial Market Tumble on Wuhan Coronavirus Issues - Photo by SMCP

JAKARTA (TheInsiderStories) – The outbreak of a SARS-like coronavirus (2019-nCoV) in Wuhan has escalated rapidly over the past week. A total of 224 cases of pneumonia caused by the new Wuhan coronavirus had been confirmed in China by Monday (01/20).

Just a week later, by Jan. 27, the total number of confirmed Wuhan virus cases in China had escalated to 2,761, with a total of 82 reported deaths attributed to the Wuhan virus. In addition to restricting public transport movements in and out of certain badly impacted cities such as Wuhan, China has also banned all group tourism travel sales by travel agencies in China for travel both within and outside of China with effect from Jan. 17.

Furthermore, the Chinese government has announced that the Lunar New Year holiday period, which had originally been from Jan. 24 to Jan. 30, has been extended by an additional three days of public holiday due to the coronavirus outbreak.

A number of major Chinese cities have announced further postponement timetables for the reopening of companies after the Lunar New Year, with the Shanghai government having announced that companies in the city of Shanghai will not be allowed to reopen until Feb. 9, 2020.

With consumption spending having become the most important growth driver for the Chinese economy in recent years, a key near-term risk is from the negative impact on consumer confidence in China if the Wuhan epidemic continues to escalate.

With many entertainment venues in China, including an estimated 11,000 cinema theaters as well as major resorts such as the Disneyland park in Shanghai having temporarily closed due to the Wuhan virus outbreak, the immediate negative impact on China’ entertainment industry is already significant.

Economic Impact on Asia-Pacific Region

Over the past two decades, the rapid economic growth of China has made it a key export market for many Asia-Pacific nations. However, China’ growing importance in Asia-Pacific trade and investment flows has also created considerable vulnerability for the Asia-Pacific region from this type of unpredictable “black swan” event currently hitting the Chinese economy.

Sectors of the Asia-Pacific economies that are particularly vulnerable to a SARS-like virus epidemic that can be spread by human-to-human transmission are retail stores, restaurants, conferences, sporting events, tourism and commercial aviation.

Among the most vulnerable sectors to the Wuhan virus epidemic are the Asia-Pacific travel and tourism sectors, particularly due to China’ travel ban on group tours out of China. Since the 2003 SARS crisis, outbound international tourism visits from China to the rest of the world have boomed, so the risks of a global SARS-like virus epidemic spreading rapidly globally have become even more severe.

The rapid rise in household incomes in China has triggered a boom in Chinese tourism visits abroad, which have risen from 20 million in 2003 to 150 million in 2018. Consequently the vulnerability of many Asia-Pacific economies to a slowdown in Chinese tourism visits has increased significantly over the past two decades.

Thailand has been one of the most notable beneficiaries of the boom in Chinese tourism, with total annual Chinese tourist visits to Thailand having risen from 2.7 million in 2012 to 11 million in 2019. Chinese tourism spending in Thailand was estimated to have reached US$18 billion in 2019, amounting to over 25 percent of total international tourism spending in Thailand.

With a high share of Chinese tourism visits to Thailand being group tours, the Thai economy is particularly vulnerable to the new Chinese travel restrictions and the expected sharp near-term slowdown in Chinese tourist visits.

Chinese tourism has become increasingly important for Japan’s tourism industry, with total Chinese tourist visits to Japan having reached 9.6 million in 2019, accounting for 30 percent of total foreign tourist visits. A key concern for Japan is also the potential risk from the Wuhan virus for tourism visits related to the Tokyo Summer Olympics in July – August 2020 if the virus has not been contained by early summer 2020.

Chinese tourism has also become very important for Vietnam’s tourism industry, with total Chinese tourism arrivals having reached 5 million in 2018, accounting for one-third of total international visits.

China has also become the largest source country for international tourist visits to Australia, accounting for 1.4 million visits in the 2018 – 2019 financial year, or around 15 percent of total international tourist visits.

The Asia-Pacific commercial aviation industry is also vulnerable to the impact of the new restrictions on Chinese tourism abroad, with initial indications that the regulatory restrictions on group travel will remain in place for at least a couple of months, depending on how the Wuhan epidemic evolves in coming weeks.

Due to the boom in Chinese international tourism travel in recent years, many Asian airlines have ramped up their direct flights between major Chinese cities and many popular Asian destinations. Air travel on these routes will inevitably be hit hard, at least in the short-term, due to the new travel restrictions.

Near-Term APAC Outlook

The Wuhan coronavirus poses a significant downside risk to the near-term Asia-Pacific economic outlook in 2020 if the epidemic continues to escalate in coming weeks. A key risk to regional trade is from the transmission effects to the Asia-Pacific supply chain if China’ near-term economic growth momentum softens significantly in first quarter (1Q) 2020, since China is by far the largest economy in the Asia-Pacific region.

The extent and duration of this negative shock to regional economic growth will depend on how quickly the Wuhan virus epidemic can be brought under control, which remains very uncertain.

Asia-Pacific governments are likely to respond with a range of fiscal and monetary policy stimulus measures to support near-term growth momentum, particularly measures to help the tourism and travel sectors, which are particularly vulnerable to this economic shock.

by Rajiv Biswas, Asia Pacific Chief Economist at IHS Markit