Market optimism is gradually fading and the exchange rate faces greater volatility as China’s workforce slowly returns to their jobs and normalise distortions caused by soft trading activity over the Lunar New Year holiday, said Zhou Hao, senior emerging market economist Asia at Commerzbank.

“The yuan is not reflecting a reasonable level now because of the impact from the holidays,” he said. “There is debate on whether the yuan needs to catch up with the depreciation of other currencies. China’s growth and the virus situation are all negative for the yuan.”

Apple confirmed it would reopen some stores in Beijing from last Friday with reduced hours, and Foxconn, Apple’s main iPhone manufacturer, has resumed part of its production at its main factory in the central Chinese city of Zhengzhou.

But it remains unclear when businesses and the finance sector would resume full operational capacity, said Jimmy Zhu, chief strategist at Fullerton Markets. Poor market activity in the foreign exchange rates meant the yuan had not been moving much, he added.

The yuan has not fallen below the 7 per dollar mark in the past month, but any clean break below the symbolic threshold could point to further downside toward 7.20 this year, Commerzbank’s Zhou said.

Larry Hu, head of China economics at Macquarie Bank, said that authorities may wait to see first quarter gross domestic product (GDP) data before deciding whether to make major policy changes, adding “things are going to get much worse before they get better.”

“The top three reasons for extended business suspension are local authorities’ requirement, firms’ concerns about the coronavirus outbreak, and difficulty for employees to return to work,” said Robin Xing Ziqiang, Morgan Stanley’s chief China economist.

Production levels had only reached about 30-50 per cent of capacity last week, with a return to normal not expected until mid-late March, Xing said.

However, China’s central bank has started to provide policy support to mitigate the virus’ effects, including pumping 1.2 trillion yuan (US$174 billion) into financial markets. Interest rate cuts are anticipated and local governments are expected to introduce targeted fiscal measures to support small and medium-sized enterprises.

But China’s inability to curb the outbreak, combined with uncertainty about the true extent of the epidemic, has done little to foster confidence that things are under control, s aid Gaurav Saroliya, director of macro strategy at Oxford Economics.

“The trouble with the virus risk is that its course cannot readily be altered by policy easing,” Saroliya said.

The number of confirmed infections is still growing fast in Hubei province, the epicentre of the outbreak. Analysts said that was likely because of improving diagnosis efficiency and, in some cases, the virus’ continued spread.

Pictet Wealth Management has lowered China’s growth forecast to 5.6 per cent from 5.9 per cent this year. Oxford Economics has revised down its estimate to 5.4 per cent from 6.0 per cent, while Moody’s has cut its prediction to 5.2 per cent from 5.8 per cent.

The measures introduced by Chinese authorities are unlikely to fully compensate for the loss of output in the near term, Pictet said in a note.

“This is because the losses so far are mainly in the form of services (tours have been cancelled, movies have not been seen, dinner appointments have been scraped),” Pictet said. “In other words, damage to the real economy has already been done, and there will be further damage as long as the various restrictive measures are still in place.”