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China Coronavirus 2020 Economic Financial Forecast
April 03 2020 - Will The Chinese Economy Lead The Rebound From The Coronavirus Pandemic? By Investors Business Daily
Even before jobless claims soared above 6.6 million in the week ended March 28, the coronavirus pandemic was expected to cause a deeper global recession than the financial crisis of 2008-09. But the recovery to that recession could potentially come much more quickly. And, as in the earlier recovery, the role of the Chinese economy once again is key.
The coronavirus pandemic, which has shutdown businesses across more than 30 states and left more than two-thirds of Americans effectively confined to quarters, is a much different emergency than the earlier banking crisis. China — from which the virus erupted in December — has had its two-month lockdown and has seen its infection and death rates peak, then subside. At least for now. Still, the government worries about a possible resurgence of the virus as businesses, industries and social activity returns to normal.
The Chinese economy is the world's second largest behind the U.S. Its GDP growth generally runs about double that of the U.S., but it has been ferociously strained by the effects of the three-year trade war with the U.S. China's debt profile and cash are not what they were a decade ago. Government and business worldwide are closely monitoring its restart, to see whether it has what it still has the wherewithal the to plot an escape for a planet falling into recession.
What Will Post-Virus Chinese Economy Look Like?
So far, government fiscal stimulus for the Chinese economy has been restrained compared to 2008-09. On Monday, the People's Bank of China cut its short-term lending rates by the most in a half decade. On Tuesday, the central government rolled out a raft of stimulus measures including income support for poor Chinese, lower deposit reserve requirements and a $140 billion cash injection for small banks.
The government also plans to roll out special long-maturity bonds its has deployed only twice in the past, an indication of dire need. Nomura estimated the government could use between $282 billion and $563 billion of the bonds, according to Bloomberg.
Still, those measures are meager compared to the fiscal heavy-lifting underway in the U.S. and Europe. The bottom-line for China? Its post-virus revamp may be delayed if its factories take a beating as orders evaporate from the U.S. and Europe. Matters could turn even worse if a wave of new Covid-19 cases were to emerge.
"Beijing is in limbo right now (during the final weekend in March) — workday traffic is getting back to normal, most people are back at work, but most restaurants, gyms and entertainment businesses are still closed and folks are still not really venturing out for recreation, except to parks," said Thomas Gatley, a Beijing-based analyst at Gavekal Dragonomics.
The Household Income Hurdle
Gatley noted that weak household income growth will be a hurdle. "Most domestic sectors will rebound in coming months, while consumer services should get back toward a pre-Covid trajectory, Gatley added. That would be good news for local companies, and for multinationals with large retail footprints in the country, such as Apple (AAPL), Walt Disney (DIS), Nike (NKE) and Starbucks (SBUX)
Export industries may face a slower revival, Gatley says. "The biggest hit is going to be to export sectors, facing a huge hit to demand from the U.S., Europe and beyond."
On the plus side, most of China's 290 million migrant works have returned to where they were employed. Coal consumption at power plants has rebounded.
Chinese Economy 2020 Growth Estimates Slashed
Delivery giant FedEx (FDX) in mid-March said about two-thirds of small manufacturing businesses and around 90% to 95% of large companies in China were back to work.
Property-sales volumes in 30 major cities has rebounded during the month to 60% of normal levels, said a UBS report.
Even so, China's economic indicators for the first quarter will be "very grim," said Shehzad Qazi, managing director of China Beige Book International. It conducts surveys of 3,300 Chinese firms and 160 banks.
"China officially got back to work in March," Qazi said. "But China did not get back to productivity. Factories are ready to produce — but their export markets are now shut. They can process a backlog of orders, but transportation ports, be it Los Angles or Italy, are shut down. And, many orders may not get paid."
Qazi added that the Chinese economy had serious issues before the coronavirus outbreak hit. Chinese companies and local governments are awash in debt. Businesses across the country, strapped for cash, sought more bank loans last year to pay their bills, he said.
Amid the coronavirus pandemic, "Many Chinese companies are going to be suffering from a cash flow crunch," Qazi added.
The Chinese economy posted GDP growth of only 6.1% in 2019, down from 6.6% the year before, its lowest pace in almost three decades.
China's government closed off the city of Wuhan, the Covid-19 epicenter, and then much of the country in January and February. At that point, some economists began lowering 2020 GDP growth estimates toward 5.5%.
IHS Markit in the past week projected that China's economic activity will "plummet at a near-double-digit rate in the first quarter" amid cratering industrial output and retail sales. It forecasts growth of just 2% in 2020.
Government Fiscal Stimulus Response Timid?
The government worries more about rising unemployment than hitting growth targets at this point, says IHS senior economist Yating Xu.
"As the epidemic situation escalates in the U.S. and E.U., China's economic policies are shifting away from promoting economic growth to maintaining stabilization — stable labor market, prices and exchange rate," she said in an email.
Bank of America has lowered its growth estimate for the China economy to 1.5% in 2020 and rebounding to 8.5% growth next year. A consumption-based recovery, though, will have hurdles.
"The problem is that whenever there is manufacturing weakness in the economy, ultimately consumption gets hit," Qazi said. "Now you've got this virus altering social norms. People will be paranoid about sitting next to each other watching movies or in restaurants. You may not see services driving growth if factories are sitting idle in the fall."
China World's Largest Auto Market
At Matthews Asia, investment strategist Andy Rothman says China can still play an important role in a recovery. In a report, he said the Chinese economy "could put a floor under global growth and offer a safe haven to investors."
China is the world's largest automobile market, moving more than 21 million units in 2019. The U.S., the second largest auto market, sold fewer than 17 million vehicles. Before the coronavirus pandemic, China was also on track to become the world's largest retail market — with estimates putting 2020 retail sales at $5.6 trillion, $100 billion more than the U.S.
Jacob Kirkegaard, analyst with the Peterson Institute for International Economics, says China could be a bright spot by 2021.
"In a relative sense, there's no doubt China will be a positive market for multinationals, certainly those in the services sector," he said.
However, Kirkegaard added that China's fiscal response to the coronavirus emergency has been muted compared to 2008-09.
"The idea that China is going to rescue the global economy again — I think that is not looking at the facts of what's been going on there," Kirkegaard said. "They've been trying to control the descent of the Chinese economy for quite some time now. They've been focusing on deleveraging and other things. Compared to the stimulus packages we've seen in the U.S. and Europe, the Chinese response has been in a macroeconomic sense very timid. That's clearly a policy choice."
Coronavirus Pandemic: Wuhan Lockdown Ending April 8?
In the U.S., Congress unleashed an economic stimulus package estimated at $2.2 trillion, its biggest ever. The Federal Reserve has slashed interest rates to near zero, has been pumping cash into the economic via bond purchases, and pledges no limits to those purchases as it combats business shutdowns.
In 2008, China launched a 4 trillion yuan ($560 billion) stimulus package and took other measures amid the threat of a global depression. Beijing allowed local and provincial governments to borrow heavily and spend whatever they liked, says Gatley at Gavekal Dragonomics.
By 2010, China's economy was humming. GDP rose 10.6%, helping to restart economies around the world.
In Beijing, the thinking may be that China's economy will recover this time without trillions in spending. Another factor may be that the Trump administration has chosen not to temporarily remove trade tariffs placed on China, says Kirkegaard.
China has plenty of room to push down interest rates, unlike the U.S. which is on the verge of pushing its benchmark lending rates into negative territory. China could announce consumption measures, such as car purchase incentives, says IHS's Yating Xu.
"April — after the Q1 GDP is released — could be next policy window," she said. "If global recession worsens and domestic demand contraction lasts for a long time and impacts employment stability, more easing is likely."
Party Political Meetings Postponed
China's government let businesses reopen in Wuhan, the city where the coronavirus pandemic reportedly started, on March 30. The mandatory lockdown on travel in and out of the city is slated to end on April 8. Wuhan is a transportation and manufacturing hub for China.
One development to look for is for China to get "Lianghui done," said Gatley, the pair of congressional meetings to make national level political decisions.
China postponed the annual meetings of the National People's Congress and the Chinese People's Political Consultative Conference, due to health risks related to the Covid-19 outbreak.
When China does finally hold the events, it would be a credible sign that government worries over a Covid-19 resurgence have eased. China's 2020 growth target was expected to be released at the March NPC.
Barclays analyst Jian Chang in a report said Beijing may be moving too slow.
"We see significant risks that China's stimulus will be too late to support a second-quarter recovery," she said. "The government appears reluctant to repeat previous policy steps, and is yet to announce a fiscal package to boost investment. We think a timely stimulus policy would need to involve infrastructure or property. However, boosting consumption at the local level seems to remain the focus, for now."
Rooting for the China economy to rebound might be a tough pill to swallow for some investors amid the coronavirus pandemic.
There's a view that President Xi Jinping misled the world on the severity of the country's coronavirus outbreak as well as the preexisting U.S. trade friction. There's also worry that China could expand its global influence through aid to poor countries hit by Covid-19.
As it stands, investor confidence in a China economic recovery has gained traction, though there's also a realization it's not out of the woods.
Chinese Economy: Stock Markets Rally In March
Like most of the world's stock markets, China's domestic stock markets have been volatile. A rally in March sent the tech-heavy Shenzhen Composite briefly to a two-year high on hopes for coronavirus-related stimulus.
Some Chinese ETFs — such as iShares MSCI China (MCHI) and Invesco China Technology (CQQQ) — remain down for the year, but hold relative strength ratings above 80 amid stock market volatility.
Also, in the U.S., some Chinese e-commerce and internet stocks have held up well amid the coronavirus bear market. They include Alibaba Group (BABA), Tencent Holding (TCEHY), JD.com (JD), and Vipshop Holdings (VIPS).
More insights into China's economy will come when companies report earnings or pre-announce results in April and May.
Will Disney Theme Parks In Shanghai, Hong Kong Reopen?
Nike on March 25 said 80% of its stores in China were open in Greater China vs. 75% being closed during the Covid-19 outbreak in February.
Yum China Holdings (YUMC), which operates KFC and Pizza Hut units in the country, says 95% of stores are operating. Yum China has shifted its sales focus to delivery channels.
Shares in Apple, Disney and Tesla Motors (TSLA) could move on new developments in the Chinese economy amid the coronavirus pandemic.
Whether and when Disney's theme parks in Shanghai and Hong Kong can fully reopen is one question. Another nagging questions — whether Tesla shifts more electric vehicle production to its gigafactory in Shanghai.
Apple contract manufacturer Foxconn is expected to resume full production capacity in April. But, it's unclear whether Apple will forge ahead with production of 5G-ready iPhones. Apple could delay its 5G iPhone launch into 2021, some analysts say.
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