ANALYSTS say that the Chinese economy is likely to be more sensitive to the coronavirus than was the case with SARS.
As NN Investment Partners notes, in 2003 the economy was mainly investment-driven, since China was in the midst of an investment boom, with fixed investment growth close to 20%. Today, the Chinese economy is more consumption-driven and for this reason is more sensitive to confidence levels. Fixed investment growth is currently only 5%.
Moody’s Investors Service says in a new report that the ongoing coronavirus outbreak will primarily hurt China's economy by lowering discretionary consumer spending on transportation, retail, tourism and entertainment. But while there is likely to be a marked drop in revenue and profits across China for several months, Moody's estimates that both the central government, and regional and local governments (RLGs) have the financial means to absorb the economic and fiscal shock.
Moody's says that the downside risks to its 5.8% GDP growth forecast for 2020 have increased, adding that credit implications for government are evolving.
From a sub-sovereign perspective, as the seventh-largest province by GDP, the slowdown in Hubei will have ripple effects on nearby cities and provinces, likely reducing RLG tax and fee revenue. Hubei's role as a key manufacturing and transportation hub, linking China's eastern coastal area with the central and western regions along the Yangtze River Economic Belt, increases the contagion effect of both the region's economic slowdown and the spread of the virus.
Liquidity remains a key focus of Moody's credit analysis, especially during periods of severe disruption, such as the current one. The People's Bank of China has already injected liquidity into the financial markets in order to ensure that credit keeps flowing.
Moody's says in the report that Chinese brick-and-mortar retailers selling discretionary items, travel-service providers and transportation companies are most exposed to disruptions from the coronavirus outbreak.
"The ongoing transportation suspensions, travel bans and overall reduced customer traffic flows are weakening sales and cash flow - thereby raising credit risk - in particular, for companies in the Chinese retail, travel and transport sectors," says Cedric Lai, a Moody's vice president and senior analyst.
"More broadly speaking, we see a risk for domestic supply chains to be disrupted, which would translate into output losses as transport becomes or remains disrupted, workers are evacuated, or products from suppliers are not delivered," he adds.
Companies in the advertising, auto, cement, chemical, construction, food and beverage, mining, property, refining and steel sectors have moderate credit risk, although credit risk would rise if disruptions continue for an extended period.
Moody's also expects weaker demand for public services and lower fiscal revenue and land sales income for regional and local governments, which would in turn be credit negative for local government financing vehicles (LGFVs).
Companies in other industries, such as oil and gas, oilfield services and utilities, are less exposed, as their business operations are not directly disrupted by the government's efforts to contain the virus.
Moody's expects funding conditions will remain favourable for most rated state-owned companies, as well as for LGFVs and industrial and property companies with sound financial strength. However, financially weak privately-owned companies could face funding pressure and remain exposed to refinancing risk.