China's feverish stockmarket weighs the cost of the coronavirus

China’s stockmarket fell by 8% in one day – the biggest daily fall in more than four years. But investors shouldn't panic.

The economic effect of the coronavirus could be four times greater than the cost of Sars

China’s stockmarket has recorded its biggest daily fall in more than four years. The CSI 300 plunged by 7.9% on Monday, its first day of trading since the coronavirus (2019-nCoV) outbreak came to dominate international headlines. Hong Kong’s Hang Seng index is down by 6.5% so far this year. The FTSE 100 has fallen 3.5% since the start of January.

Gauging the damage to growth

The market retreat came as more countries tightened restrictions on travel to China. The US and Australia have banned foreign nationals who have recently visited China, while Russia has closed its border. British Airways was one of several airlines to suspend direct flights to the Middle Kingdom, with some carriers cancelling routes until March.

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A national holiday has been extended and activity in provinces representing two-thirds of the country’s GDP is largely on pause. That’s a reminder that “it’s not the disease, it’s the treatment”, say Andrew Batson and Ernan Cui of Gavekal Research. The economic costs of 2019-nCoV will be determined as much by the official response as by the fatality rate. These “draconian restrictions” are guaranteed to deliver a first-quarter GDP hit, but the longer-term effect will depend on how long it takes to contain the outbreak and how long tough quarantine measures remain in place. 

The virus crisis will have global consequences, says Sabah Meddings in The Sunday Times. China is a key manufacturing hub for smartphones, cars and clothing brands and its growing middle class has also turned it into a “giant import market”. Closed shops and factories will “hit almost every multinational”. The toll on growth could reach $160bn, Warwick McKibbin of the Australian National University told Cecile Daurat on Bloomberg: four times greater than the cost of the 2003 Sars epidemic.

The Sars precedent

The 8% sell-off in Asia is scary, but investors shouldn’t panic, says Jim Armitage in the Evening Standard. Chinese businesses are not worth 8% less than they were last week. Growth will “return with a vengeance” once the virus ebbs. “We’ll look back on today’s prices as a decent buying opportunity for China-focused stocks and funds.”

The consensus is that the coronavirus will follow a similar pattern to Sars, says James Mackintosh for The Wall Street Journal. There will be a short-term hit to travel stocks, but the outbreak will be contained and the long-term fallout limited. Supportive central banks will help to ease any turbulence. Yet other precedents are less encouraging. Flu pandemics in 1957-1958 and 1968-1970 “killed one million or more people world-wide and coincided with US recessions”. What’s more, adds Nils Pratley in The Guardian, China is a far bigger and more connected economy now than it was in 2003. Equity valuations are much more stretched than just after the dotcom bust. “Don’t panic” is sound advice, but this “hunt for reassurance from history feels absurd”. 



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