Slow China Restart Could Inflict Bigger Pain, Nomura Says

(Bloomberg) --

The coronavirus outbreak may have a bigger and longer-term impact on China’s economy than thought, as fewer migrant workers have returned for work than in previous years and business activities have been slow to pick up, according to Nomura Holdings Inc.

To contain the spread of the novel coronavirus pneumonia (NCP), Chinese authorities have ordered city lockdowns and extended holidays at the expense of near-term economic growth. The impact of such efforts could extend well into March owing to the slow resumption of businesses, which will likely result in rising numbers of bankruptcies, mass layoffs and worsening demand, economists including Lu Ting, chief China economist at Nomura in Hong Kong, wrote in a note.

“While we emphasize that there will be a V-shape recovery after the NCP is contained and the medium-to-long term economic impact of the NCP should be limited, we are concerned that markets might be too complacent when evaluating the NCP’s near-term shock,” he wrote.

The ratio of migrant workers that have returned to cities for work is substantially lower this year than in 2019, the economists said, while most people had returned to their hometowns before the Lunar New Year as usual. The “cumulative return rate” in the firm’s sample of 15 major cities was 18.4% on the 15th day after the Lunar New Year, around one fourth of the rate recorded on the same day in 2019.

The government expects that another 160 million people will return to work from now until February 18, transport ministry official Xu Yahua said in Beijing Tuesday.

Travel and business activities also dropped sharply and broadly in urban areas in China, the firm said. An index tracking traffic flows in major cosmopolitan areas, the Gaode Congestion Index (GCI), showed traffic is close to free-flow status with barely no congestion, while congestion usually recovers to normal levels around the Lantern Festival, the 14th day after the Lunar New Year, when business operations normalize.

“Our flat and low GCI suggest that the recovery in the service sector especially in urban areas, including transport, catering, and entertainment is still out of sight,” the firm said.

A slew of other indicators also displayed a similar trend. Overall passenger traffic flows were roughly 80% lower during the first 16 days of this Lunar New Year holiday compared with the same period last year, Ministry of Transport data showed. Daily coal consumption, new home sales volume and box office revenues were all significantly down from 2019’s levels.

The pain felt in China could ripple through the globe, given the size of the Chinese economy. The likelihood of a global recovery in the first half of this year could have already been reduced, Nomura’s economists wrote.

--With assistance from Claire Che.

To contact Bloomberg News staff for this story: Lin Zhu in Beijing at lzhu243@bloomberg.net

To contact the editors responsible for this story: Jeffrey Black at jblack25@bloomberg.net, James Mayger

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