SARS fear dominates Asia

Fear of Severe Acute Respiratory Syndrome (SARS) has dominated the discussion of Asian markets over the past month.

Daniel Ben-Ami, 22.05.2003
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One reason the disease has caused so much concern is that it is centred on China: which is fast becoming the economic hub of the region. Mainland China accounts for over 5,124 of the 7,628 worldwide cases of SARS so far according to the latest figures from the World Health Organisation. Hong Kong accounts for another 1,698 of the global total.

Although foreign access to the Chinese stockmarket is limited what happens within the Asian giant is, through trade and investment links, having an increasingly large effect on the whole region. For example, Hong Kong and Taiwan-based firms are among the largest investors in firms within mainland China.

To make matters worse the SARS epidemic is centred on the industrial region of Guangdong; which borders onto Hong Kong. Along with the Yangtze river delta, which is around Shanghai, the region is at the centre of China’s manufacturing miracle of the past two decades.

There are numerous ways in which the SARS problem could disrupt economic activity in China. As the world’s largest recipient of foreign direct investment it would probably suffer if investors were nervous about visiting the country. Small and medium-sized firms are also likely to be most hit by the cancellation or scaling down of trade fairs as they depend on these to sell their products.

Within China restrictions on travel are also likely to cause problems. The curbs on domestic travel over the early May bank holiday may have hit GDP growth. But at the same time China’s massive migrant labour force of 150m within the country makes restrictions on travel difficult to operate in practice.

Unusual step

Perhaps to quell fears about China’s growth the government yesterday took the unusual step of releasing monthly GDP figures. According to the State Statistical Bureau the economy grew by 8.9% in the 12 months to April so it seems that SARS had not affected growth till that point. But the impact of the disease may not be apparent until this month’s figures are made available.

The Asian Development Bank (ADB) has recently revised its estimates on the impact of SARS on the whole region. According to the ADB if it takes one quarter to bring the disease under control it will knock 0.4 percentage points – or $9.1 billion (£5.6 billion) – off GDP growth while if it takes two quarters there will be a 1.0 point reduction in GDP growth.

Outside of mainland China the industry worst hit by SARS is probably tourism. The entertainment and retail sectors have also suffered.

SARS also seems to be hitting fund manager sentiment on the region. In Morningstar’s European fund trends survey for April the Asian excluding Japan remained their favourite area but its lead over Europe excluding the UK narrowed considerably.

Growth slowing

The Merrill Lynch fund manager survey for May also showed that most fund managers in Asia excluding Japan now expect China’s growth to slow over the coming year.

Overall the MSCI AC Far East Free Ex Japan index fell by 2% in dollar terms from the start of the year to May 14th. In comparison the MSCI World rose by almost 6% over the same period.

Hong Kong, Singapore and South Korea all suffered small falls. But some of the smaller markets did well: Indonesia rose by 18% while Thailand jumped by 13%.

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