China’s stock markets slump on coronavirus black swan economic impact

Asian stock markets were a sea of red as mainland Chinese stock markets plunged after reopening at the end of the Lunar New Year holidays. The Shanghai Stock Exchange Index fell 8.2% by mid-morning on 3 February, with the Shenzhen Composite Index down 8.4%. The slump in mainland Chinese stock markets reflects escalating financial markets concerns about the economic impact of the coronavirus on overall economic growth, as the total number of virus cases in mainland China soared to 17,205 on 2 February 2020, according to China's National Health Commission.

The Chinese yuan has also fallen against the US dollar, breaking back above the 7.0 barrier on rising financial markets' concerns about China's worsening near-term economic outlook due to the virus pandemic. To help mitigate the impact of the virus economic shock, the People's Bank of China (PBOC) has injected CNY 1.2 trillion into money markets through reverse bond repurchase agreements on 3 February, and lowered its 7-day reverse repo rate by 10bps to 2.40%.

Most Chinese provinces have postponed the reopening of factories and offices until Monday 10 February 2020, which will have a significant negative impact on China's industrial production in Q1 2020. Factories and offices in mainland China were originally scheduled to reopen on 30 January 2020, so the delayed restart of industrial production is a major disruption to Chinese industrial production in the month of February 2020. This also creates a large negative shock to the Asian manufacturing supply chain as Chinese new orders for intermediate goods and raw materials slump in February.

• The coronavirus pandemic is escalating negative-impact effects on a wide range of Chinese companies at the forefront of the widening economic crisis, as factory output is significantly disrupted and many retail stores have closed in heavily impacted regions of China, notably Hubei province. Many foreign multinationals are also suffering negative-impact effects to their revenue in China, as increasing numbers of international firms announce temporary closures of their operations in mainland China due to the virus pandemic. Apple is shutting down all its mainland China retail stores until at least 9 February, while Starbucks has temporarily closed around 2,000 retail outlets in mainland China. Sweden's IKEA has also temporarily shut down all its retail stores in mainland China.

The pandemic has become a black swan event for the Asia-Pacific tourism industry. The escalating travel bans by many Asia-Pacific countries on visitors from China over the past few days and cancellations of flights by many international airlines to China will be a massive negative blow for the Asia-Pacific tourism industry, which has become heavily dependent on mainland Chinese tourism visitors. The new travel restrictions and cancellations of many international airline flights to China will result in the total collapse of Chinese outbound tourism to the rest of Asia in the near-term, until the pandemic can be brought under control.

The rapid rise in household incomes in China has triggered a boom in Chinese tourist 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 tourist visits has increased significantly over the past two decades. Thailand, Singapore, Malaysia, Vietnam, Hong Kong, Japan, South Korea and Cambodia are among the most vulnerable Asian economies to the negative economic shock from the collapse of Chinese tourism.

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 USD 18 billion in 2019, amounting to over 25% of total international tourism spending in Thailand. Direct tourism spending accounts for an estimated 12% of Thai GDP, with Chinese tourism having played an increasingly important role in underpinning the Thai tourism economy.

Chinese tourism has also 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% of total foreign tourist visits. A key concern for Japan is also the potential risk from the 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 travel is also a key pillar for Vietnam's tourism industry, with total Chinese tourist arrivals having reached 5 million in 2018, accounting for one-third of total international visits.

For Singapore, mainland Chinese tourist visits have become a major part of the tourism economy, with 3.4 million mainland Chinese tourist visits in 2018, accounting for around 18% of total international tourist visits. The tourism sector is an important part of the Singapore, economy, accounting for an estimated 4% of Singapore's GDP.

Australia's tourism economy, which is already reeling from the impact of the bushfire crisis, will be badly hit by the absolute travel ban on visitors from mainland China that has just been imposed by the Australian government. China has 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% of total international tourist visits to Australia.

Posted 03 February 2020 by Rajiv Biswas, Executive Director and Asia-Pacific Chief Economist, IHS Markit