Corona Virus Update: Chinese Economic Fears

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The coronavirus outbreak continues to dominate news flows this week and is visibly weighing on risk appetite. The spread of the disease is drawing scary parallels with the 2003 SARS outbreak. As such, investor uncertainty is rapidly rising.

How Far Has the Virus Spread so Far?

As of yesterday, the current infection is just below 3000 with a death toll of just over 80. The increase in infections, as well as the mortality rate, is worrying. A week ago, only three people had died from the disease. In terms of the spread of the coronavirus, the infection has been noted in each of China’s 31 provinces along with confirmed cases in 11 other countries. Of these 11 other countries, which include five confirmed cases in the US, Thailand has the most so far with eight confirmed.

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Is the Spread Getting Worse?

Sadly, health officials have confirmed that the spread of the virus is intensifying. Over the weekend, the top health minister in China said that the ability of the virus to spread (contagiousness) is getting stronger. He confirmed that the virus can now spread before any symptoms show up. This is a worrying development as it makes it even harder for airports to screen travelers for the virus. Another worrying report over the weekend noted that as many as 5 million people have already traveled out of Wuhan (the epicenter of the virus).  The city is now on lockdown. Governments are tracking the travelers who have gone abroad from China in an attempt to stop them from spreading the virus if they are infected.

Is this Virus Outbreak Similar to the 2003 SARS Episode?

The SARS outbreak in 2003 saw around 8000 people infected over the 4 months before it was contained. Of those infected, nearly 800 died. Clearly, the death toll was much higher in the case of the SARS outbreak. Compared with the SARS outbreak, authorities have also responded much quicker in terms of taking measures to combat the virus. The recent mutation of the virus is worrying. However, if health authorities can get the virus under control in less time than 2003, hopefully far fewer people will die.

How is the Economy Being Impacted?

In terms of economic impact, China will see the most damage. In 2003, retail sales and the service sector took the biggest hit. The impact this time around could actually be greater as the service sector has grown to 54% of GDP. This is compared with 42% of GDP in 2003.

In 2003, retail sales growth fell from 10% to 4.5% annually and a similar impact is likely to be seen this time around due to the countrywide lockdown.  Given the residual damage to the economy as a result of the two-year trade war with the US, the economic impact could be severe.This could lead the PBoC to further easing which should weigh on the Yuan

Technical Perspective

usdcnh

The rally in USDCNH over the last two weeks has seen price reversing sharply back above the broken 6.8982 level. Price is now very close to testing the key 7 level along with the broken bullish trend line from 2018 lows. This is a major level for USDCNH and a break back above here could be very bearish for CNH indeed.

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