In thinking about the economic implications, Axa Investment Managers consider four channels of transmission of the coronavirus from China.

According to Aidan Yao, Senior Emerging Asia Economist, and Shirley Shen, Junior Economist Emerging Asia, at Axa Investment Managers, the four channels of transmission of the coronavirus from China are tourism, trade [of goods], domestic consumption (suffering from local infections) and financial markets.

As the situation continues to unfold, the two experts refrain from providing precise quantitative estimates, rather focus on explaining channels of spillover and assessing the relative vulnerability.

Fear of Infections

Tourism is the most direct channel of shock transmission. As the Chinese government has imposed strict travel bans and many airlines suspend flights, the number of international travels by Chinese residents has fallen precipitously. This will hit the tourism industry in Asia, with the risk of the shock enlarged by non-Chinese starting to reduce travels due to fears of infections, which also happened during SARS.

Since SARS, regional economies such as Hong Kong, Thailand, Korea, and Taiwan have become more exposed to Chinese tourists, who now account for almost 80 percent of all visitors to Hong Kong, and 30 percent to Thailand and Korea. Large China exposure and the importance of the tourism industry make Hong Kong, Thailand, Vietnam, and Singapore particularly vulnerable to reduced Chinese tourists.

Most Exposed Countries

The second channel is the trade (of goods). With China being a key source of final demand, a sharp slowdown in the Chinese economy – to 4~4.5 percent in Q1 from 6 percent in Q4 – will cause pains on its Asian trading partners. The countries that are most exposed are small and open economies such as Hong Kong, Taiwan, Korea, and Singapore, whereas more-domestically oriented economies such as Indonesia and India are less vulnerable.

Besides the trade-related spillovers, many Asian countries are vulnerable to shocks to their domestic demand. The experience of SARS shows that countries that saw more local-infections experienced sharper declines in domestic consumption growth. This does not bode well for economies of Thailand, Singapore, Hong Kong, and Korea as fears of infections and tighter government controls could hinder domestic activity.

Concerns About Hong Kong

There are strong concerns about Hong Kong due to its already dire economy going into the epidemic, with now a double whammy set to deepen and prolong the economic recession.

Elsewhere, although there is scope for policy response when there is a need, the policy space is generally more limited now than in 2003. At a time when Asia is already struggling to recover from the soft patch last year, a vicious epidemic could be the last straw that tips the economies into a more pernicious downturn in 2020.

Falling Equity Markets

Finally, the region’s financial markets have reacted negatively to the virus outbreak. Both stock and FX markets have fallen sharply in the past two weeks, with the MSCI Asia down 7 percent and currencies falling 1 percent against the dollar.

Since the A-share market was closed due to the Lunar New Year, China proxies, such as the HSI and KOSPI, were used to express concerns about the outbreak. Falling equity markets and widened credit spreads could tighten financial conditions and add headwinds to economies.

End of the Spectrum

Small and open economies with a large China exposure are more vulnerable than large and inward-looking economies. Hong Kong tops the list, as expected, followed by Taiwan and Korea, while India and Indonesia are the least-impacted end of the spectrum.