Coronavirus: China’s Xi Jinping promises action as economic growth machine stalls in first quarter of 2020
- Contraction of 6.8 per cent in the first quarter of 2020 ends China’s long unbroken official run of economic growth
- Politburo meeting chaired by President Xi Jinping vowed to support the economy, amid biggest crisis in decades
Chinese President Xi Jinping promised the government would take more aggressive steps to support growth after the economy shrank by 6.8 per cent in the first quarter.
A politburo meeting chaired by Xi on Friday concluded that China would be more aggressive in its economic policies to counter the impact of the coronavirus, after the first contraction since quarterly records began in 1992.
The last official contraction in 1976 had been for the full year, and came as China was coming out of the Cultural Revolution.
“We should look at the economic situation in the first quarter with a normal heart, we cannot simply compare the economy this year with the previous ordinary years,” said Mao Shengyong, spokesman for the National Bureau of Statistics, alluding to the extraordinary challenges of the year so far.
The 6.8 per cent shrinkage in China’s economy was deeper than many expected, although economists were divided on how deep the contraction would be, and how honestly it would be reported.
It all means that even as the government money ploughed into construction projects starts to bear fruit, consumer confidence will take more time to heal.
Liang Zhonghua, chief macro analyst at Zhongtai Securities, added that these insecurities have ensured that hopes of a quick recovery in China have all but vanished.
“The decline in individual income, the rise of unemployment, and the closure of many companies and self-employed businesses will all weigh on the total demand over a longer period of time,” Liang said. “The economy can be quick to pause, but slow in getting back to normal.”
Because as well as the domestic challenges, which Beijing can at least take steps to address, there are external challenges it can do little about. With large parts of the world now in coronavirus containment mode, China’s exporters are frozen out of their marketplaces.
It means the modest recovery in the industrial economy, in the form of a better-than-expected 1.1 per cent slump in March, is unlikely to last.
“We believe hopes of a quick recovery are dimming, as China still faces two dire challenges,” said Lu Ting, chief China economist at Nomura. “Collapsing external demand due to the pandemic and the rising threat of a second wave of Covid-19 infections. We expect year-on-year real [gross domestic product] growth to remain negative at minus 0.5 per cent in the second quarter.”
The importance of preventing a second wave of infections is also front and centre in the thinking of policymakers.
“Stability is the foremost priority. We must ensure that there’s no rebound in the epidemic, and we must ensure economic stability and people's basic livelihood,” read the Politburo statement.
The statement added that preventive measures will be long-lasting and include mandatory coronavirus testing for vulnerable people and voluntary tests to all those who want them, and that production and social resumptions must happen alongside the preventive measures.
“In terms of policies, the Chinese government is on the track of a gradual escalation in its stimulus policies,” said JP Morgan Asset Management’s global market strategist Chaoping Zhu, pointing to a second cut to a key interest rate this week as well as a sharp increase in government-led investment and lending.
“The collapse in external demand and the weak service sector recovery means Beijing must embark on a broad infrastructure and property stimulus,” wrote Rory Green, China economist at TS Lombard in a note. “Labour-intensive construction is the only means to absorb the sharp spike in unemployed workers.”
However, the statement from the Politburo meeting said that Beijing will not tolerate speculation in the property market as “houses are for people to live, not to speculate”.
Additional reporting by Orange Wang