The service sectors of China as well as of Vietnam—including transport, accommodation, tourism, retail, hospitality and entertainment—will be hardest hit by the 2019-nCoV outbreak.

Tourists in downtown HCMC. Like China, the sector which will be hardest hit
by the epidemic in Vietnam is the services, including transport, accommodation,
tourism, retail, hospitality and entertainment - PHOTO: THANH HOA 

The 2019 novel coronavirus (2019-nCoV) outbreak is rattling investors worldwide. Wuhan City, the capital of Hubei Province in China, is the epicenter of the outbreak, which is causing a domino effect on China’s economy.

According to the latest report by Bao Viet Securities Company (BVSC), China’s decision to lengthen the Lunar New Year festival will have an impact on her economy this quarter. Late last week, China announced the Purchasing Managers Index (PMI) in January was 50 points, slightly lower than the previous month’s 50.2 points. However, the data are based on surveys conducted before January 20, 2020.

Meanwhile, the 2019-nCov outbreak which drew public interest started in mid-January. This time gap implies that the January PMI does not fully reflect the impact of the epidemic. If the epidemic develops out of control, the Chinese Government could take more tough measures, leading to production halt in more cities and provinces besides Wuhan. Should this scenario come true, the PMI will fall drastically in the short term.

The production disruption in China may have certain negative impacts on the global production, as China is an important link in the global supply chain. The shortage of materials supplied by China may interrupt production in a number of countries, typically those in the Association of Southeast Asian Nations (ASEAN).

The service sector is rated as being the hardest hit by the epidemic, specifically services like transport, retail, hospitality and entertainment. Of note, the ratio of services in China’s gross domestic product (GDP) has increased 12 percentage points over the past 17 years, from 42% in 2003, when the Severe Acute Respiratory Syndrome (SARS) broke out, to the current 54%. With such a large ratio, if the 2019-nCoV outbreak is not controlled early, it will have a more severe impact on China’s GDP growth than the SARS in 2003.

At the peak of the SARS, China’s GDP fell 2%, from 11.1% in Q1 2003 to 9.1% in Q2 2003. Notably, during the SARS, China’s economy was in the expansion phase of the economic cycle, while the economy is in the decline phase at the present time. Therefore, the 2019-nCoV outbreak could worsen the economy more, at least in Q1, and even Q2. In the SARS in 2003, it took China eight months to control the epidemic which left more than 8,000 infected cases and 800 people dead.

Collateral damage for Vietnam?

Though there are not many 2019-nCoV infected cases and no death from the virus in Vietnam, the Government has taken strong measures to prevent the virus spread, such as suspending issuing visas for Chinese tourists and organizing festivals which have not yet opened, and letting students off school for a week. According to BVSC, these measures will have a certain negative impact on Vietnam’s economy.

Like China, the sector which will be hardest hit by the epidemic in Vietnam is the services, including transport, accommodation, tourism, retail, hospitality and entertainment.

Chinese tourists accounted for about 30% of the total number of international visitors to Vietnam in 2019. Therefore, the suspension of visa issuance for Chinese tourists will definitely hit tourism. Further, the present time is the peak of spring travel and festivals of domestic tourists; so the epidemic will deal a hard blow to these activities. Of note, these are seasonal activities, and can hardly be offset in the coming months, even when the epidemic is out.

The service sector made up 41.6% of Vietnam’s GDP in 2019. Though this ratio is not as high as that of China, the sector accounted for 45% of the GDP growth. Services which recorded high growth are wholesale and retail (up 8.82%), transport and warehousing (up 9.12%) and accommodation and catering (up 6.71%). These are areas which will be greatly affected by the epidemic. 

The agro- forestry and fishery sector will also get hit when exports of agro-, forestry and fishery products to China may fall. China is the main market for Vietnam’s agro products.

Last year, agro-product exports to China amounted to US$5.92 billion, accounting for 35% of Vietnam’s agro-product exports. Therefore, if trade with China is affected by the 2019-nCoV epidemic, the growth of the agro-, forestry and fishery sector, which is already low, will drop further, causing a fall in consumption of workers in this sector.

The disruption in the global supply chain due to the 2019-nCoV in China may affect the import of some material inputs for production in Vietnam.

According to the estimate by Bloomberg, the ratio of Vietnam’s intermediary goods imports from China is as high as 40%. So, the epidemic in China could affect the production of some key export commodities of Vietnam, such as phones and electronic components, computers, electronics, textiles and garments, and footwear.