February 4, 2020

Novel Coronavirus Triggered Panic of China and Global Financial Markets

by Xav Feng.

The new coronavirus (designated 2019-nCoV) has exploded in China during the Chinese New Year (CNY) holidays, killing more than 400 people and infecting over 20,000 people in China as of Feb 3rd. All countries are struggling to control its spread and the virus has triggered some big concerns and negative impacts for China and global financial markets.

The initial outbreak of the virus escalated just before CNY holidays. China is the most populous nation on Earth with nearly 1.4 billion people, and Chinese consumers spent more than 1 trillion yuan ($145 billion) last year on holiday shopping, dining, entertainment, and travel. Due to the outbreak, the Chinese government has announced an extension of the holiday period and stopped travel in and out of Wuhan and surrounding cities, effectively locking down tens of millions of people.

It is expected that the short-term negative impact is thus likely to be concentrated among restaurants, hotels, and airlines. Many factories typically schedule production stoppages during the CNY holidays anyway, so the timing of the epidemic may minimize the need for further shutdowns. Similarly, many government offices and schools had planned holiday closures independently of the virus outbreak.

The coronavirus outbreak has triggered some big concerns and panic in the global financial markets, especially in China and those countries which rely on China. Fund flows, however, do not seem to have suffered adverse effects from the outbreak so far. Single-country funds focused on China have posted continuous outflows since October 19. The first disease was reported on December 19, and since then there have only been $9.5 million in net outflows posted for the category. Although we haven’t seen huge net outflows as of yet, more might have been posted but not yet reported since January 20.

 

Fund flows of all China-focused funds

Source: Refinitiv Lipper, All funds’ geographical focus is China single country, $million

The fast-spreading coronavirus outbreak could possibly further hammer China’s first-quarter gross domestic product (GDP) growth by about 1-1.5 percentage points in the worst-case scenario. Its GDP growth in the first quarter of 2020 could be about 5%, and we cannot rule out the possibility of falling below 5%.

 

China Historical GDP

Source: Eikon

China Shanghai Composite Index closes nearly 7.72% down in a $393 billion share sell off that saw the majority of stocks suspended after hitting the 10% daily volatility limit on the first day of trading since the extended Lunar New Year holiday over fears of the coronavirus. The market could see further turbulence as investors remain very concerned that the situation around the Wuhan coronavirus outbreak might deteriorate.

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