China reported today a 6.8% drop in gross domestic product (GDP) for the first quarter of 2020 compared with the same period last year. Even as life has started going back to normal in most of China, the road ahead for its economy still looks challenging.
It’s the first economic contraction for the country, once dubbed the world’s growth engine, since at least 1992, when Beijing started releasing quarterly GDP figures. Other estimates suggest that it is the first negative quarter China has had since 1976, which marked the end of the decade-long Cultural Revolution that pushed the Chinese economy to the edge of collapse.
China also reported a slew of other key economic data, which look equally grim. Retail sales, which declined by 20.5% on-year for January and February, decreased by 15.8% in March from a year ago. Fixed-asset investment outside rural households, which reflects construction activity, as well as industrial output, an important indicator for measuring economic performance, extended their losing streak from the first two months to drop 16.1% and 1.1% in March from the previous year, according to China’s National Bureau of Statistics.
The historic slump, mainly caused by China’s lockdowns of cities to contain the epidemic, first spotted in its central city Wuhan, lays bare what to expect even after relatively successful containment of the virus. While China is gradually re-emerging from the crisis, countries like the US and Italy are repeating some of the worst nightmares China had in the early days of the outbreak, news of which was reportedly suppressed by Beijing initially. China now accounts for only 4% of the over 2 million confirmed coronavirus cases worldwide, compared with 32% for the US.
Global economic forecasts have also become increasingly pessimistic in recent weeks. The International Monetary Fund said the virus could cause the worst global recession since the Great Depression in the 1930s, while the unemployment rate in the US could reach 20% as soon as next month, according to a note from JPMorgan.
Although China could provide some indication of what’s in store for other countries as they try to restart commerce, the lessons that can be learned from how the world’s second-biggest economy tries to revive its economy are limited—its political and cultural structures are much different than those in the West, and there have long been doubts about the veracity of its economic data. China’s one-party state also means it can deploy measures on a much larger scale, and much faster than other political systems.
Still, one takeaway is the rebound could be more gradual and less V-shaped than some economists had hoped, say analysts. “China’s Q2 GDP, while could be better than Q1, should still see a negative growth year-on-year. This is partly because of the sluggish global demand caused by the virus, leading to canceled orders for many Chinese factories,” said Raymond Yeung, chief China economist at Australia & New Zealand Banking Group in Hong Kong. Another factor that complicates the recovery process is the changing dynamic in international relations. “After the outbreak, the trade relations between China and other countries could get worse, posing a bigger challenge for Beijing,” he added.
Among the obstacles Beijing faces for reviving its economy, the most notable one is probably declining exports, which accounted for around 20% of the country’s GDP in 2018.
Although Chinese exports bounced back quickly in March, falling 6.6% year-on-year in dollar terms compared with a 17.2% fall in the January-February period, this is probably not a long-term trend. The better performance in March is largely because orders halted during the first two months were finally delivered as China resumed work, but as soon as those orders have been delivered, exports could decline further again, according to a note (link in Chinese) this week from analysts at Chinese brokerage Orient Securities. Global demand is expected to “sustain a huge shock” from the virus in the coming months and in turn affect Chinese exports, wrote the analysts.
Meanwhile, the struggle of China’s small-to-medium (SME) enterprises, which provide around 80% of urban employment, also became apparent. Over 85% of SMEs said they could collapse within three months if they couldn’t get financial help, according to a survey done by China’s Peking and Tsinghua universities in February. A recent survey (link in Chinese) also showed that March revenues of SMEs in China declined by nearly 60% year-on-year even as the situation started getting better.
China announced a surprising improvement in unemployment for March today, however, with the number inching up from 6.2% for the January-February period to 5.9%. Whether the data tell the full story is in question as Beijing does not count its 288 million migrant workers when calculating the figure.
Domestic consumption, while billed as the most important driver for China’s economic growth as it contributed 58% of its GDP last year, also looks sluggish. The expected “revenge shopping” sprees seem unlikely to occur as people are worried about a second wave of outbreak and the economy overall.
Will more stimulus help?
For now, China’s major stimulus measures include a reported $400 billion of infrastructure investment, slashing its bank loan rate by its biggest level since 2015 to make it easier for companies to borrow, more infrastructure bonds sold by local governments, increasing its national fiscal deficit as a share of GDP, and issuance of special sovereign debt. It also plans on giving small lenders a credit line of 1 trillion yuan ($140 billion) from its central bank. Some are expecting the country to roll out more financial relief measures.
However, compared with other countries, which have prepared aid packages worth trillions of dollars to try to buttress workers and businesses from the coronavirus disruption, China’s stimulus—at around 3% of GDP— still looks modest (Germany’s emergency aid is around 20% of GDP).
The relatively small package may signal that heavy indebtedness means Beijing has less room to maneuver than it did a decade ago during the 2008 financial crisis, when its relief package equalled to around 16% (paywall) of its then GDP. But analysts say that this could be a good opportunity for Beijing to abandon its obsession with GDP targets, which needs further stimulus to spur, to instead focus on improving individuals’ livelihoods.
“The government should not pay too much attention to stimulating GDP and its growth rate… Instead, it should focus on how to help industries, firms, and individuals that are suffering most from the coronavirus diseases survive,” said Yu Zhi, an economist at Renmin University in Beijing.