China’s economy set for V-shape recovery as coronavirus cases level off soon and stimulus kicks in, says Credit Agricole CIB
- The French bank sees first-quarter growth easing to 3.5 per cent, full-year expansion at 5.7 per cent as Beijing cuts rates and injects liquidity
- Yuan to strengthen to 6.9 per US dollar as the economy gets back on track as early as the second quarter, economist says
The coronavirus outbreak in China has almost reached its peak and the economy could see a V-shape recovery, according to Credit Agricole CIB.
The French investment bank expects China’s first-quarter gross domestic product growth to slow to 3.5 per cent year on year before averaging 5.7 per cent for the full year on the back of policy stimulus to put the economy back on track, according Dariusz Kowalczyk, the bank’s chief China economist and senior emerging market strategist.
Without the central bank’s stimulus, the world’s second-largest economy could expand by 4.6 per cent in 2020 versus 6.1 per cent in 2019 that was also the slowest since 1990, he said.
Credit Agricole CIB’s first-quarter forecast is gloomier than some in the market. Dong Chen, senior Asia economist at Pictet Wealth Management, last week lowered his base-case forecast to a range of 4 to 4.5 per cent, from 6 per cent previously.
Economic activity across many sectors, including real estate and manufacturing, stopped completely this month, as China put dozens of cities under lockdown to contain the epidemic that has so far infected more than 45,000 people and claimed more than 1,110 lives, mostly in mainland China.
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Zhong Nanshan, one of China’s top respiratory disease experts, said this week that new infections will peak by the middle or end of this month. Government statistics show that the number of new infections in Hubei province, where the disease originated, fell for six consecutive days from 1,121 cases last Wednesday to 545 on Monday.
Kowalczyk said while anecdotal evidence and other sources suggested that the numbers were much greater than reported, “we probably can rely on the direction of the reported number and the trend [to measure] the trajectory of the illness”.
He added that a rapid containment of the disease could lead to a V-shape recovery and that he was “confident we are moving in that direction.”
His forecast also provided for “multiple peaks” scenario, noting new cases could spike again as some 160 million people return to the cities where they are employed over the coming week.
Credit Agricole CIB expects the economic recovery to be led partly by further monetary easing. It sees a 15 basis points cut in China’s policy rates and a 100 basis points cut in the reserve requirement ratio – the amount of cash that banks must hold in reserve – during the first half this year.
For the year, the yuan is forecast to 6.9 per US dollar on the back of a recovery that is likely to start as soon as the second quarter. It will be supported by the country’s improving trade balance and better current account position, now that fewer Chinese tourists were travelling abroad. The yuan was indicated at 6.9775 on Tuesday.
The bank, however, cautioned that if the economy takes longer than expected to recover, then the yuan would weaken to 7.2.
Sébastien Barbé, head of emerging market research and strategy at the bank, said that Hong Kong and Singapore no doubt will be affected the most by the outbreak because of their proximity to China. Australia and New Zealand are also vulnerable if the epidemic escalates as they rely heavily on exports to the mainland.
The disease could trim the GDP growth of Australia and New Zealand by 0.2 percentage points this year as they both have high exposures ranging from exports to tourism with China, he added.
