Coronavirus: think the worst is over for China’s economy? Not so fast
- Recent data has raised hopes of a slow recovery but the news might not be as good as it looks
- Debt, non-performing loans, bankruptcies and job losses are all likely to rise sharply in coming months
The Chinese economy’s plunge into negative growth is its first since it began its meteoric rise four decades ago.
However, even with its record 6.8 per cent contraction in gross domestic product in the first quarter of this year, the world’s second-largest economy still might outperform its developed peers, such as the European Union, the United States and Japan, all of which are expecting their greatest economic crises since the Great Depression in the 1930s.
Indeed, the Chinese collapse is likely to foreshadow even more painful scenarios for all the major developed economies.
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China was until recently the world’s fastest-growing major economy, though it has suffered in recent years, going from a peak growth rate of 14.2 per cent in 2007 to just 6.1 per cent last year, its slowest rate of growth since 1990.
Now the world’s focus will be on whether China can post a slow recovery, as economic activities in the country have largely returned to normal.
Despite the disappointing quarterly figures, China’s economic activity showed a notable rebound in March. For instance, growth of industrial production, fixed asset investment and retail sales rebounded to -1.1 per cent, -9.4 per cent and -15.8 per cent year-on-year from -13.5 per cent, -24.5 per cent and -20.5 per cent in the January to February period.
But it is too early to see the March figures as proof of a Chinese recovery. A host of uncertainties remains.
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Firstly, the rebound in March is a result of activity resuming after the widespread lockdowns of late January and February. The initial disruption has been so severe that even a partial resumption of economic normality has been enough to bring about a remarkable bounce in activity.
Domestically, the economy is still far from getting back to full capacity, as is evident by the sharp decline in travel within major economic hubs and between cities.
According to the Ministry of Transport, the seven-day average of overall passenger trips made nationwide on railways, roads, waterways and on civilian flights was 19.8 million on April 17. That is down from an average 47.4 million on the same day last year.
Metro passenger trips in major economic hubs have also declined sharply. In Shanghai, the seven-day average of metro passenger trips was 6.7 million on April 19, down from 11.1 million a year ago. In Guangzhou, the same average was 5 million, down from 9.3 million, and in Beijing the figure was 3.1 million, down from 9.4 million.
Externally, there are greater uncertainties ahead, given the worldwide spread of the disease. Beijing has imposed a strict ban on the entry of foreigners and has tightened its border controls. Chinese also face barriers in travelling abroad.
Given these restrictions, a still developing global pandemic, and the lingering risk of a renewed outbreak in China, a full recovery in this or coming quarters appears unlikely.
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China’s economy has long been driven by a trio of capital investment, consumption and exports. Of these, investment might be the first to recover.
China’s policymakers have already flagged supportive measures, such as increasing fiscal spending, cutting lending rates and reserve requirements, and allowing more local government special bonds for big-ticket infrastructure projects. The effect may already be evident: overall fixed assets investment contracted only 9.4 per cent in March, compared to the 24.5 per cent decline in the January to February period.
However, the size of the policy stimulus has been modest so far due to concerns about financial stability and high levels of debt, which was already above 300 per cent of GDP before the coronavirus outbreak. To date, Beijing’s fiscal response to the pandemic has been little more than 3 per cent of GDP, compared to 10 per cent in the US and 20 per cent in Japan.
For consumption and exports, we should expect things will get worse before they get better. National Bureau of Statistics headline retail sales growth remained subdued at -15.8 per cent year-on-year in March, compared to -20.5 per cent in the January to February period. Consumer-facing activities were stagnant, affected both by quarantine measures and social distancing, and increased consumer caution.
A survey of restaurants found that revenue was down 58.5 per cent from January 1.
Meanwhile, the contraction in global growth means Chinese exports are likely to fall sharply in coming months due to plummeting demand. Gavekal Dragonomics estimates a 20-45 per cent drop in Chinese exports will cause China’s GDP growth to decline by between 4 and 8 percentage points in the second quarter.
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With all major developed economies facing deep contractions in the April-June period, China will not be spared the global recession.
Most institutions forecast the Chinese economy to continue to contract in the second quarter due to the lockdowns in developed economies.
And that challenge comes even as the country faces its most severe challenges yet with debt, non-performing loans, bankruptcies and job losses all likely to rise sharply in coming months.
Even if the country outperforms its developed peers and ekes out some growth this year, the road to recovery is long and uncertain. The International Monetary Fund expects China to maintain positive growth of 1.2 per cent this year,while it predicts the world will experience a recession worse than the Great Depression.
The most optimistic forecasts at this stage envisage a stabilisation of the Chinese economy. But even those optimistic about China’s fortunes should be cautious. Much of China’s economy today relies on the rest of the world, and for the rest of the world things are going to get worse before they get better. ■
Cary Huang is a veteran China affairs columnist, having written on the topic since the early 1990s
