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China’s economy has been hard hit by the coronavirus outbreak. Photo: AP

Coronavirus: China likely to introduce new measures to bolster economy, analysts say

  • Analysts have cut their forecasts for China’s first quarter gross domestic product (GDP) growth to a contraction of up to 6 per cent
  • The change in sentiment came after the release by the National Bureau of Statistics (NBS) of the official manufacturing purchasing managers’ index (PMI)

China is expected to launch new policies to support economic growth, observers say, after figures showed the coronavirus outbreak hammered activity in the nation’s manufacturing and services sectors in February.

Analysts have cut their forecasts for China’s first quarter gross domestic product (GDP) growth from a consensus of about 4 per cent to a contraction of up to 6 per cent following the publication of the data on Saturday.

But most said the government would continue to shy away from redeploying the massive stimulus measures it used in response to the global financial crisis of 2008-09, which left local governments with massive debts from which they are still trying to recover.

The change in sentiment came after the release by the National Bureau of Statistics (NBS) of the official manufacturing purchasing managers’ index (PMI), which fell to an all-time low of 35.7, from 50 in January. The previous low was 38.8, which was reported in November 2008.

China’s non-manufacturing PMI – a gauge of sentiment in the services and construction sectors – also plunged to an all-time low of 29.6, from 54.1 a month earlier. Readings below 50 represent a contraction in activity within a sector.

ANZ analysts said in a note that until now, “the government has targeted aid to affected sectors and enterprises, rather than using stimulus. Given the reluctant policy response, China is unlikely to repeat the post-global financial crisis scenario when the authorities unloaded a 4 trillion yuan (US$573 billion) stimulus package”.

The analysts estimated a 2 per cent contraction in China’s first quarter growth.

Despite the poor data, a large-scale stimulus plan might not be on the immediate horizon because there are other ways for China to cushion the impact on the economy from the coronavirus, analysts said.
In terms of monetary policy, it is still necessary to continue to reduce the reserve requirement ratio and interest rates
Liu Xuezhi
In February, the People’s Bank of China (PBOC) cut lending rates to lower financing costs for businesses, while the Ministry of Finance accelerated the authorisation for local governments to borrow an extra 290 billion yuan (US$41.5 billion) in special-purpose bonds to fund infrastructure projects and so help stimulate growth.

Bank of Communications analyst Liu Xuezhi said he expected further fiscal easing by Beijing in the coming weeks through a loosening of fiscal and monetary measures.

Beijing was likely to expand its budget deficit target to allow for more sales of special bonds to fund infrastructure projects, he said.

“In terms of monetary policy, it is still necessary to continue to reduce the reserve requirement ratio and interest rates,” Liu said, adding that this would “ensure that funds flow into the real economy by continuing to drive the real economy’s financing costs down”.

The PBOC last cut the ratio – or the amount of money lenders must deposit with the central bank – by half a percentage point at the start of January – its eighth cut since early 2018 – releasing about 800 billion yuan (US$114.4 billion) into the financial system.

Li Huiyong, deputy general manager of Huabao WP Fund Management, said he expected stronger support policies to be implemented this month, including further spending programmes and cuts in interest rates.

But Larry Hu, chief China economist at Macquarie Capital in Hong Kong, said he did not expect Beijing to introduce a major stimulus “any time soon”.

“The key difference between now and 2008 is that policymakers know things will bounce back soon this time around, but they didn’t in 2008,” he said.

Still, a contraction in China’s economic growth in the first quarter is now looking inevitable, with PIMCO, one of the world’s largest money managers, saying it could be as much as 6 per cent from the same period of 2019.

China’s economy grew by 6.1 per cent in 2019, its lowest annual rate for 29 years, the NBS announced in January. Beijing has not published a growth target for this year but it is widely expected to be around 6 per cent.

While President Xi Jinping has said repeatedly that China will strive to achieve its economic and social development goals for the year despite the coronavirus outbreak, analysts are more sceptical about the chances of a quick economic rebound.

Although some factories have managed to resume operations after the extended Lunar New Year holiday, many businesses, especially in the services sector that represents more than 50 per cent of the economy, continue to struggle.

“Based on past experience with [severe acute respiratory syndrome], the services sector recovered much slower than the manufacturing industry,” analysts at Minsheng Securities said in a blog post, adding that they were likely to remain under pressure in the short term.

This article appeared in the South China Morning Post print edition as: China likely to pass new measures to lift growth
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