Growth may slide to 4% in 2020; fragility exposed

The situation in China is stressed and uncertain, and it will get worse. Chinese authorities have taken significant measures to contain the coronavirus, locking down large cities and transport hubs as well as severely curtailing the flow of people during the, extended, Spring Festival holiday. Nevertheless, the number of infections has doubled nearly twice each week since January, now set to reach 50,000 reported infections by end-February. Every province, city and town, and household and company has been affected.

What is more certain, is the negative impact that containment measures will have on China’s, and inevitably the global, economy. In fact, it has altered the prognosis of the global economy in 2020.

The better-than-expected China data as at December last year and concomitant momentum into January had lifted global sentiment, as did the long awaited signing of the Phase One of the trade deal, which, although  an over-reach in terms of China’s commitment to import an additional USD200bn from the US by 2021, de-escalated the tensions between the world’s largest two economies.

Recall, just last week China’s macroeconomic data was steadfast, recording PMI figures for manufacturing and services of 50.0 and 54.1 respectively. Certainly, some even thought that the Chinese economy would drive global growth in 2020 thanks to effective policy support, thereby supporting global commodity markets and emerging markets.

However, the coronavirus has sharply halted such growth expectations. Now, the envisioned path of the economy, and the policy tilt of Beijing, that was expected to manifest in 2020, is largely irrelevant. Any notion of 6% in 2020 is simply no more.  More likely, the economy will be playing catch-up throughout 2020. By the time the coronavirus has been contained, China’s economy could see growth skid to 4.0% in 2020 (6.1% in 2019). Current consensus is for 4.5% for Q1:20, followed by a rebound and stabilization.

But, even 4.0% in 2020 may prove hard given that the coronavirus has come at a time of the relative resilience of China’s economy being questionable, low growth seeming entrenched and structural, and the effectiveness of both monetary and fiscal being muted. Beijing could find projects but workers willing to head out to build now are in short supply. Small enterprises engaged in manufacturing battling with disruptions to supply chains and logistics likely won’t be coaxed by falling interest rates and available bank loans into expanding production facilities.

The, already stretched, financial system will face tremendous pressure in the coming months, and continuing to ring-fence pockets of stress will test the agility of policymakers who won’t be able to focus on the medium- and long-term objectives, such as de-disliking the financial system, as they’ve done in the past three years. Already, the CBIRC has stated that they will go easy on their macro-prudential assessments, for instance, pausing pressure on financial institutions. The regulator has urged banks to reduce fees and ensure any firms facing disruptions or supporting the fight against the the coronavirus have access to loans and necessary support. The CBIRC has even encouraged the central bank to cut rates.

The PBOC pushed over USD160bn in liquidity (a net injection of USD20bn) into the banking system on 3 February following the Spring holiday extension of three days so that the host of obligations coming due wouldn’t see the cost of money spiking and cause further alarm. The central bank also reduced the interest rates of both 7- and 14-day reverse repos, but more importantly stated that further and abundant support would follow. We’d expect activity in open market operations, sizable use of the standing lending facility, sizable cuts to the RRR, and even broadening access to the discount window.   

But, none of this will make much difference. What is more certain, is that the outbreak outcome is unknown.

Across the country, cities remain in lockdown. Even in Beijing, only the necessary roles had returned to work by 3 February. Most employees have been advised to remain at home for another week through to 9 February, and any individuals who travelled to regions that have more than a certain number of infections are to remain there for two weeks. Schools are closed until 17 February, and universities until 24 February – but both could be extended.  

If the infection hasn't been brought under control by end February, the backdrop for the important two sessions annual meetings of the National Peoples Congress will be a battered economy, rising unemployment, and a highly stressed population.

Expect support for infrastructure spending and starkly less emphasis on the de-risking campaign. The NDRC has stated that it would encourage projects and enterprises in good condition to resume work and production. However, shovel-ready projects are relatively few and far between. Thus, commodity- exporting countries could hardly expect a surge in demand.

Meanwhile, rollover risk for real estate developers was already something we identified as a material downside risk in 2020. Having started offering large discounts in late 2019, developers now face a formidable test, as sales will slump by at last 25% y/y in January and February 2020. This will reverberate throughout the economy.

Of course, the most immediate direct impact will be felt in consumption. Closures during the SARS crisis in 2003 caused retail sales to slip from 15% growth in January to just 6.5% in May. It certainly possible that retail sales fall from 8% to 4% over the same time while consumer movements are being as severely curtailed as right now is the case.

One should therefore prepare for a business climate negatively impacted at least until April or May. Policymakers will do what they can but the global impact on sentiment, supply chains, tourism, commodity demand and so forth will be material.  

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