Asia must brace for short-term volatility as Covid-19 hits China and South Korea harder than expected

The surge in infections in South Korea is dampening economic activity even as China struggles to return to work, hurting demand for exports from the rest of Asia

Governments are rolling out accommodative measures but if Covid-19 continues to spread, expect uncertainty to remain in the near term

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Soldiers in protective suits disinfect the area outside a Shincheonji church in Daegu, South Korea, on March 1, as Covid-19 cases outside China surge. Photo: AP

Published: 4:00pm, 6 Mar 2020Updated: 10:28pm, 6 Mar 2020

As the number of new Covid-19 cases in China slows, the fast spread of the coronavirus elsewhere has become a major worry. South Korea has the largest Covid-19 outbreak outside China, while infections in Italy and Iran have jumped in recent weeks, with reports of community spread in Europe and the United States.

Concerns of a looming Covid-19 pandemic has triggered a sharp response from investors in the past few weeks. The sell-off in global equity markets deepened, while the yield on the benchmark US 10-year Treasury bond fell to a record low.

Equity markets in Asia have also corrected sharply since mid-February, in part reflecting a repricing of the larger and more prolonged negative impact of the coronavirus on the region, given two recent developments.

First, the short-term disruptions to economic activity in China and South Korea are likely to be more significant than previously thought.

In China, while the number of new infections has declined, it is taking time to get people back to work. Reports suggest that around 79 per cent of large enterprises and some 30 per cent of small and medium-sized enterprises had resumed work by the end of February.

Companies where workers have gone back are unlikely to be operating at full capacity, as the return rate has also been low due to travel restrictions and quarantine measures. While there is likely to be some improvement in March, a full resumption by the end of the first quarter may still prove difficult. This means some production weakness will linger early in the second quarter.

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