The Strategist

Experts: Impact of coronavirus on Chinese economy is more convincing than Fed's zero rate

03/17/2020 - 09:27

The main macroeconomic indicators of the Chinese economy sagged by 13–25% in January-February against the backdrop of the fight against coronavirus, as seen from the first official data from the National Bureau of Statistics of the PRC. This is much worse than expected by analysts: apparently, Chinese statistics became the main reason for the collapse in world markets. This did not prevent the US Fed from a large-scale easing, its plans to buy back assets for $ 700 billion and joint actions of the world’s largest central banks on providing dollar liquidity. The Fed rate at around zero (0-0.25% per annum) no longer convinces anyone that everything that happens is a temporary set of factors.

China's industrial production in January-February decreased by 13.5% in annual terms (there was an increase of 6.9% in December); the decline was 13% in the service sector (after 6.8% in December), according to the National Bureau of Statistics of the PRC. The indicators became the worst in the history of observations and radically diverged from analysts' expectations, suggesting a 3-5% decline in industrial production in February. Against the backdrop of quarantines, retail sales in China dipped by 20.5% (8% in December), and this affected online retailers. Capital investment in China also declined more than expected - by 24.5% (from 7.3%); the main decline was in processing.

According to Capital Economics, such a decline in the industrial sector and the service sector is equivalent to a decrease in GDP in January-February of about 13%; moreover, the last time negative growth rates in annual terms were recorded in China in 1976.

The main recession occurred in February, so the combination of statistical data with January softens the depth of subsidence - and the March figures may turn out to be worse, the center believes, noting that the spread of the virus outside of China will hinder the rapid recovery of the economy due to lower demand for Chinese exports.

Judging by the published data, the Chinese government no longer expects to achieve the growth target this year (it was set in the range of 6–6.5% in the past, but in fact amounted to 6.1%), according to Capital Economics. The center expects an official estimate of growth of 4% in the first quarter, while experts' own estimates indicate a decline of 2%.

The country's authorities announced tax breaks for small companies, and the State Council of China approved a new investment plan, which involves large-scale investments in the development of 5G networks, big data centers and transport infrastructure. In total, these measures are equivalent to 6-6.5% of GDP, ING Bank estimated. The Central Bank of China, in turn, further lowered the reserve ratio for banks; earlier, other measures had been taken to ensure liquidity and soften financing conditions. Also, from April 1, China will remove restrictions on the participation of foreigners in the capital of companies working with securities for the sake of opening the Chinese capital market for foreigners, the Securities Market Regulatory Commission (CSRC) said.