Coronavirus crisis: at this rate, how is China’s economy going to recover lost ground?

The latest consensus forecast for the Chinese economy is rather upbeat, and must reflect expectations of further stimulus measures. However, the government’s virus containment efforts continue to hamper the resumption of economic activity

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A woman wearing a mask walks past a road blockade made mostly of shared bicycles in Guangzhou, Guangdong province, on February 24. Although regions less affected by the coronavirus, such as Guangdong, have resumed work faster after the Lunar New Year holiday, businesses are still far from operating at full capacity. Photo: EPA-EFE

Published: 9:15am, 27 Feb 2020Updated: 9:28am, 27 Feb 2020

The escalation of the coronavirus epidemic has completely changed the consensus narrative about China’s economic performance in 2020. The cautious optimism that followed the signing of the phase one trade deal between the US and China has now given way to acute concerns about an economy that has been paralysed by a severe epidemic for more than a month.

Even assuming a quick resolution to the crisis, followed by a decent recovery, the Chinese economy will probably struggle to deliver growth much higher than 5 per cent.

Therefore, the consensus forecast for full-year growth of 5.8 per cent despite the epidemic – according to the latest Bloomberg survey – must reflect expectations of significant policy easing by China. However, while stimulus measures may help the economy, it is worth cautioning that their effectiveness is heavily contingent on how the Covid-19 outbreak evolves.

To the extent that much of China’s macro outlook will be driven by the epidemic, it is encouraging to see some progress in the fight against the coronavirus.

Since early February, the daily increase in infection cases in China has fallen steadily, from nearly 4,000 to about 500. Recent changes in diagnostic methodology have created volatility in the data, but not derailed the overall declining trend.

What is also encouraging is that the infection rate outside the epicentre of Hubei has dipped to below 10 cases a day, thanks to Beijing’s aggressive quarantine tactics to contain the spread of the coronavirus. Since Hubei accounts for 4 per cent of China’s gross domestic product, this means that normality could gradually return to the other 96 per cent of the economy.