Via China Daily

A tourist wearing a facial mask walks past a “Tuk Tuk” in Bangkok on Feb 11.[Photo/Agencies]

The outbreak of the novel coronavirus epidemic presents a significant challenge to the Chinese economy and to other Asian economies who are in the neighborhood.

There are four transmission mechanisms for the economic challenges to spill out from China to the rest of Asia.

First is a direct hit to the tourism sector. Second are distortions along the supply chain. Third would be softened external demand due to slower China growth. Last but not least, weaker business and consumer sentiment given the heightened uncertainties caused by the virus.

The tourism industry is taking the most direct and significant shock.

The Chinese authorities have suspended group tourism services. Authorities in other economies have imposed restrictions on Chinese travelers along with travelers coming from or related to the affected areas.

For example, the Singapore government has banned entry for all Chinese visitors and travelers with a recent history of travel to China.

Outside the Chinese mainland, the Hong Kong SAR and the Macao SAR are most directly exposed to a sharp tourism slowdown. Mainland visitors compromise around 70 percent of total visitors to those two areas. The suspension of the mainland Individual Visitors Scheme and group tourism will result in sharp declines in visitor arrivals for both regions.

The Macao SAR government has also temporarily suspended casino services. Airline operators in Hong Kong have significantly reduced the number of flights to the mainland. High-frequency data already showed that mainland tourism arrivals fell to a record low after the imposition of travel restrictions.

We expect this situation to remain until there is more clarity on controlling the virus. Retail, catering, hotel and other consumer services are likely to suffer the most.

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Within Asia, Thailand’s economy may be hit the most by a sharp fall of Chinese visitors, given around 10 percent of its GDP directly comes from the tourism industry and more than 25 percent of its visitors are from the Chinese mainland.

The hit to the tourism sector will unlikely come from Chinese travelers. The risk of contagion may result in a significant decline in non-China related tourism. Singapore, as an international traveling hub, may suffer badly. Other tourism-heavy economies like the Philippines and Vietnam will all be facing significant tests.

On the other hand, North Asia is likely to face more distortions in production due to supply chain interruptions.

South Korea and Taiwan are both top trading partners of the Chinese mainland. Production suspensions have been extended to most of the key production bases in the Chinese mainland.

Interruptions to the tech supply chain are significant to both Taiwan and South Korea.

Many of the upstream component suppliers in North Asia, especially in the consumer electronics industry, have already adjusted down their first quarter shipment expectations due to the stoppages in downstream production.

Beyond the current production suspensions, we are seeing further risks from delays in new product launches. The year 2020 is expected to be the first year for the 5G era. It is challenging for producers to arrange large scale product launches given the uncertainties resulting from the virus.

The 2020 Mobile World Congress, one of the most important annual events for the consumer electronics industry, has been canceled due to health concerns over the viral outbreak.

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The potential hit to consumer income may also hinder the appetite of buyers for discretionary consumption, resulting in some delays or even permanent losses in consumer purchases.

While China is the biggest production base for consumer goods, the country has also gained significant market share as a supplier of production materials to the rest of the world. China’s share in the global exporting market of auto parts has reached 8 percent at this time, compared to 1 percent during the SARS outbreak in 2003.

Within Asia, China’s importance as an upstream supplier of auto parts could be much bigger. Hyundai, South Korea’s top automaker, had to report some production suspensions in its home in Ulsan, South Korea, due to China-related component shortages.

Similarly, Nissan, another top auto producer, has announced the suspension of some of its production lines in Fukuoka, Japan.

As China is now one of the top commodity buyers in the world, the production loss in China is putting downward pressure on shipments from commodity exporters in places like Australia.

There are opportunities though for some sectors.

While the virus is a negative shock to all, some of the new forms of economic activities are better positioned to post some gains. Online activity is taking the chance to gain market share over offline competitors. Some foreign cross-border e-commerce platforms are gaining recognition in China as suppliers of health protection goods.

That said, the gains made by online activity are unlikely to offset the loss in offline activities on a macro level.

We believe that the novel coronavirus shock to Asian economies is likely to be transitionary. Learning from the experience of SARS and more recently the MERS outbreak in South Korea, the tourism industry tends to recover rapidly once the virus is brought under control.

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The supply chain disruptions would fade away if the virus is checked in time or the producers move to viable alternatives.

We also expect the Chinese economy to rebound after the epidemic and lead the external demand recovery for other economies. However, the pace of recovery would likely vary according to idiosyncratic factors such as the starting point of individual business cycles.

For Hong Kong, the recovery is likely to be a lot more challenging given it was in a weak condition to start with. For South Korea, its post-virus recovery is likely to be swifter given the underlying tech cycle upswing and its large fiscal expansion.

William Deng is an economist with UBS Investment Bank. Tao Wang is head of Asia economics and chief China economist with UBS Investment Bank.