Jan 25, 2020 (Analyticawire) — China has been hit with the virus that has already killed hundreds of people and besides the effect of the virus on people’s lives and the danger of its spreading, this outbreak has also affected China’s economy. With the major virus like this, there is a big possibility that the tourist sectors along with the trade and other important contributors to China’s economy will be affected and the country might be facing a big setback in its financial sectors as well. While as the medical professionals get more familiar with the virus there is a higher chance of getting the crisis under control, before that the economic challenges could really set the entire country back.
Can the Markets Recover?
China’s stock market has been doing quite fine for itself in recent months, reaching its peak in many years just a few weeks ago, but as the worries about possible contamination spread the stocks have been knocked down from record peaks. China relies on tourists for a lot and especially as the Lunar New Year festivities approach China usually gets the record amount of tourists flowing in. but with all the talks about the mysterious virus and the possible threats that it could pose many people are now canceling their trips, hence leaving China without the tourists and without the economic boost that comes from these large tourist inflows. This might become even harsher as China considers to open up its FX market, and in case this happens, we may be sure that top Forex brokers from all over the world will start offering CNY-pairs.
Markets are extremely vulnerable to vent like these but sometimes we have cases where the market remains stable if the other countries are sure that the crisis can be averted. Foreign Exchange Market is also vulnerable to these events but can oftentimes stay resilient. But according to many Forex brokers are predicting a fast recovery, which despite what it may look like right now is actually possible. With Australia’s wildfires, we saw only the very brief dip for the Australian dollars, that quickly got back on its feet.
When it comes to China and its markets the country had a little less international support. But it wasn’t baseless. China has already experienced a very similar respiratory disease outbreak back in 2002-2003. Severe Acute Respiratory Syndrome (SARS) epidemic, killed nearly 800 people and greatly damaged China’s tourist industry, but also hurt the worldwide travel in general. Back in 2002 China didn’t take enough action, but instead tried to cover the crisis but denying its validity. This time around China decided to just take action instead of worrying about the possible damage to the reputation and this is why the FX market and the stock market as well managed to recover to an extent. The investors were reassured by China’s actions that the country would not take its previous approach and would face the challenge head-on.
Right now we know that there have been under 500 cases of the new virus with 9 deaths so far and the government officials are trying to work on minimizing public gathering at the most affected places to keep the contaminations at minimum. The outbreak which originated in Wuhan, China has already managed to reach Thailand, South Korea, Japan, Taiwan, and even the United States while the World Health Organization (WHO) is set out to meet this week to consider whether the situation calls for international emergency. The world travel has become much more dangerous and for the past few days, with major airlines seeing substantial declines in their sales. But the industry experts are saying that since China is a country of 1.4 billion people, this isn’t the first time that they’re dealing with the situation of this sort and will likely manage to keep things from getting even worse.
How the Markets were Affected by the Outbreak
China’s yuan tumbled after the initial news about the outbreak became public.
Now the fears of the trend continuing amidst the vague future of the outbreak could take a toll on the currency. Especially heading into the holiday period, the uncertainty is a luxury that most currencies can’t afford, especially during the times where there should be a lot of tourist inflow and celebration. Chinese yuan that last traded at 6.902 and 6,9036 saw the levels below 6.86 right when the news about the outbreak started to spread. Adarsh Sinha, from Bank of America Securities, has come out to say that the trend is just an investor’s attempt to reduce the risk and that is why the exchange rate markets have taken an unfavorable turn for China. The shift in the forex market is not necessarily the pessimistic view on China’s capability to take control over the situation, it’s more so an uncertainty about the virus and its possible effects on businesses. People know that they won’t be getting a dollar-Chinese yuan fixing in and the local stock market, who have also taken a hit, will be closed. Especially considering the fact that the SARS, a virus outbreak we mentioned earlier, took a huge toll on China’s foreign exchange rates and equities.
So these concerns and shaky markets are all but unexpected.
What is different this time around is that China has made a fresh approach that it applies quite rarely of acknowledging the problem within the country and only working on fixing it.
Since the approach has been different it is likely that maybe the markets will soon recover and it may not be history repeating itself with this new disease, where the stock market and the fx market have to work vigorously to improve their conditions.
This time around China seems dead set on not letting it spin out of control even further and if the subtle but still fast recovery of China’s stock markets any indication there might be a chance for China’s economy to manage to get out of this without any major challenges. The economy will still have to endure a low for a while since the news was so major and it happened at the worst time possible for the Chinese economy but after the initial shock wear off there is a chance for fast recovery
While we’ve already seen some hesitations and backing out from the international partners if China managed to get the situation under control soon enough it will give the country a chance to bounce back within a short amount of time.