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How China's virus-fueled slowdown will transmit across Asia

Every country in the region will be hit -- in different ways

People wear masks at a main shopping area as the country is hit by an outbreak of the new coronavirus in downtown Shanghai, China on Feb. 21.   © Reuters

JAKARTA -- Policymakers across Asia are grappling with a huge question: What will be the impact of China's novel coronavirus-fueled slowdown be on their country's economy?

To put China's clout into perspective, its economy now accounts for 16% of global gross domestic product -- four times larger than in 2003, during peak of the SARS epidemic. The nation's demand for coal and oil underpin global prices, while 150 million Chinese tourists traveled abroad in 2018. The vast nation remains the world's manufacturing hub.

The spillover effects from "should not be underestimated," said Rob Subbaraman, head of global emerging market economics at Nomura. "The epicenter of COVID-19 is clearly China and China's economy is far more important to the world than it used to be."

China's GDP growth in 2020 could fall by as much as 0.5 percentage point, according to the ASEAN+3 Macroeconomic Research Office, which acts as a policy adviser to the Association of Southeast Asian Nations along with Japan, China and South Korea. The hit to China's GDP, the think tank estimates, would lead to a 0.2 point drop in growth across these 13 countries.

That is unwelcome news for policymakers facing their own economic troubles, but the impact will not be felt equally since countries dependent on large inflows of Chinese tourists are expected to be hit hardest.

The Nikkei Asian Review looks below at the potential economic blow to some countries across Asia:


Asia's second-biggest economy suffered its largest contraction in five years in the final quarter of 2019 after a sales-tax hike and a devastating typhoon. The virus outbreak now threatens to sink Japan into a technical recession.

Tourism will be hit hard as the country is a popular destination for Chinese tourists, while Citigroup economists wrote that the magnitude of the economic impact via the decline in goods exports from a further China slowdown could be "unexpectedly large."

With coronavirus cases in Japan increasing by the day, Naohiko Baba, chief Japan economist at Goldman Sachs, noted that "a larger risk is domestic consumption, particularly the negative ripple effect on nonessential, non-urgent discretionary spending, such as services." The investment bank now forecasts the country's GDP will contract 0.3% in 2020.

South Korea

South Korea's export-dependent economy last year grew at 2%, its slowest expansion in a decade. But the easing of U.S.-China trade tensions led the country's central bank to forecast it would pick up to 2.3%, and its two largest chipmakers -- Samsung Electronics and SK Hynix -- were also showing signs of recovery.

The outbreak, however, has thrown a spanner in this recovery scenario. South Korea is a central cog in global supply chains, and China remains a key trading partner for the country. This has led Citi to revise down its 2020 GDP forecast to 2%.

The unknown economic risk of the outbreak has led President Moon Jae-in to declare the country is in an emergency situation, with a need for "all possible measures" to support the economy.


Taiwan, which has been a beneficiary of the trade war, is also closely linked to China through the global tech supply chain, relying on the mainland to import intermediary products. In anticipation of a drop in production, the government has downgraded its 2020 growth forecast to 2.37% from a projection of 2.72% in November.

However, economists are optimistic, with JPMorgan analysts forecasting that external demand conditions will pick up in the second quarter and the structural trend of Taiwanese manufacturers shifting their production back to the island from the mainland will continue.

Hong Kong

Months of political unrest and the trade war sank Hong Kong's economy into recession last year. Now the virus and the territory's role as an economic gateway to the mainland has made it "the most vulnerable economy in Asia ex-Japan" to the coronavirus, according to Sonal Varma, chief economist of India and Asia ex-Japan at Nomura.

Hong Kong's geographical proximity to China and dependency on mainland visitors puts it at high risk of viral contagion. Nearly half its exports go across the border, and its vibrant service sector -- making up about 29% of GDP -- make it vulnerable to a fall in demand as the outbreak discourages public gatherings, according to Varma.

Adrienne Lui, an economist at Citi, said the bank cut its growth forecast on the outbreak to a 1.1% year-on-year contraction from a 0.7% expansion. Other analysts paint a grimmer picture should there be a longer virus-induced lockdown.


With Chinese making up 30% of all tourists to Thailand, the travel sector is most likely to be hit hardest from the outbreak. Thai exports to China, which account for more than 5% of Thai GDP, are also set to fall.

"Factory closures in China will lead to disruption for Thai companies which source intermediate products from China," said Gareth Leather, senior Asia economist at Capital Economics, who added that the textile, automotive and electronics sectors stand to face the most disruption.

The country's growth had already in 2019 on a strong currency and a global slowdown. This prompted its central bank to lower its benchmark rate to 1% this month. Thailand's Office of the National Economic and Social Development Council projects the virus will push its expansion down to 1.5% this year -- should the epidemic last through June -- down from 2.4% last year.


The regional hub for shipping, aviation and logistics counts China as a key market for its goods and services exports, making the city-state one of the most vulnerable in Asia to a Chinese slowdown.

Already battered by the trade war, Singapore's GDP growth fell last year to its slowest rate since 2009. Economists at Nomura said the economy will contract sharply in the first quarter due to a drop in tourists -- 18.9% come from China -- and negative sentiment hitting overall domestic economic activity.

The government this week downgraded its growth forecast for 2020 to between -0.5% and 1.5% this year from 0.5%-2.5%. The country has earmarked 5.6 billion Singapore dollars ($4 billion) to help businesses and households as part of its budget for this year, and will spend another SG$800 million to fight the epidemic.


With China as its biggest trading partner, Vietnam's planning ministry recently pushed the government to draw up a stimulus package this month to keep the nation's growth this year somewhere close to its 6.8% target.

The ministry said if the outbreak comes under control in the first quarter, growth this year will be 6.25%, but should it keep going for another quarter it could fall under 6%.

Economists at Citi, however, said growth could drop under 4% this quarter, and lowered its annual projection to 6.2%.


Like many of its Southeast Asian peers, Malaysia's growth last year was lackluster at 4.3% -- its lowest rate in 10 years. Nor Shamsiah Yunus, the central bank governor, is bracing for a rough ride.

Yunus said in mid-February that the outbreak would hurt growth this year due to lower tourist numbers, and spending on hotels, retail, transport and restaurants. Slower demand and production disruption in China will affect manufacturing and commodity exports, she added.

"Factory shutdowns in China are likely to have caused significant disruption to manufacturing as firms experience supply shortages of Chinese-made parts," said Alex Holmes, Asia economist at Capital Economics. He projected that growth will fall to 1.5% in the first quarter -- much bigger than the SARS hit.


The country was expecting a strong rebound after seeing GDP growth slow to its lowest pace in eight years in 2019, as it targeted an expansion of 6.5% to 7.5% this year.

Economists at Nomura said the epidemic will affect Philippines through the tourism sector and related services. Chinese tourists account for 22.1% of total international arrivals, up from just 4.1% in 2005. But with the expected slowdown, the bank has slashed its growth forecast for this year to 6.4% from 6.7%.

The central bank acted this month to shore up the economy by by 25 basis points to 3.75%, its first cut since September. "The spread of the 2019 novel coronavirus could have an adverse impact on economic activity and market sentiment in the coming months," said Benjamin Diokno, the central bank governor.


Mostly immune from the global supply chain issues involving China, Indonesia appears to isolated from the epidemic. To the surprise of many -- given the large number of Chinese tourists to the resort island of Bali -- the nation has yet to confirm a single case of the coronavirus.

But the country's ban on flights to and from mainland China has meant its tourism industry has taken a significant hit. "Slower growth in China coupled with lower commodity prices [a major export from the archipelago nation] will affect Indonesian exports," economists at Nomura said.

Bank Indonesia, the central bank, on Thursday, lowering its key interest rate for the first time in four months to 4.75%. While Gov. Perry Warjiyo remained optimistic the economic impact will be short and there will be a V-shaped recovery, the bank downgraded its forecast for this year to between 5% and 5.4% from 5.1% to 5.5%.


India has been relatively shielded from the fallout from the coronavirus and China's slowdown. Economists at Nomura say it is not part of the global value chain centered around China, with only 5.3% of its total exports going there. Chinese also account for 2.7% of total visitors.

However, India-based analytics company CRISIL notes that for Indian importers, "supply disruptions in key segments is the biggest threat," with consumer durables, electronics, solar panels the hardest hit as these sectors rely on shipments from China.

That is an unwelcome development in a country where consumer demand was already flagging, and growth has decelerated rapidly in the past two years. Moody's said it has revised its growth forecast for India to 5.4% for 2020 from 6.6%, saying its revisions reflect "wholly domestic challenges, rather than external factors."

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