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

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.

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However, a rapid containment of the coronavirus is only a necessary, but by no means sufficient, condition for the realisation of the upbeat consensus forecast. Two other conditions are necessary: namely, an orderly resumption of the economy, and sufficient policy support.

On the first point, there are fewer reasons for optimism. The draconian restrictions imposed by Beijing to contain the outbreak continue to hamper both the movement of people and the resumption of economic activity.

As of mid-February, the transport ministry estimated that only 80 million out of 300 million migrant workers had returned to work; overall passenger trips over the Lunar New Year travel period were also down 50 per cent from last year.

The shortage of workers has slowed the resumption of work even in regions less affected by the virus. Although powerhouse provinces such as Guangdong and Jiangsu, and cities such as Shanghai and Beijing, have resumed work faster than other areas, businesses are still far from operating at full capacity.

Daily data on traffic congestion, coal consumption and property sales confirm this trend of economic anaemia, even a month into the new lunar year.

With regard to economic growth, the risk has gradually shifted from the direct impact of the virus to a general fear of the virus that is slowing the restoration of economic order. This fear is not only prolonging the initial shock, but also making it that much harder to recover lost economic ground later on.

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Fortunately, official help is on the way. Numerous fiscal measures have been announced over the past weeks to resuscitate the economy, including a further front-loading of local government bond quotas to expedite infrastructure investment.

Many regional authorities have also cut or deferred taxes, fees and social security payments, provided subsidies and rental assistance, and asked banks to roll over debt at lower interest rates for businesses and individuals who have been hit hard by the outbreak. These measures could help keep some small businesses afloat in hard times.

Monetary policy is playing its part, too. The People’s Bank of China cut the reserve requirement ratio at the start of the year and has continued to inject liquidity into the system after the Lunar New Year. It recently lowered the reverse repo rate, the rate on medium-term lending facility loans, and the loan prime rate to reduce funding costs and boost confidence.

Given that the turning point of the epidemic may be in sight, in China at least, the balance of official policy is likely to shift further from fighting the coronavirus at all costs to ensuring an orderly resumption of economic activity. Therefore, it is expected that there will be more policy easing to come in the weeks ahead.

Aidan Yao is senior emerging Asia economist at AXA Investment Managers