Driving the Day
1.Virus under control, but economy still struggling
The coronavirus continues to look largely under control.
- On Wednesday, China reported no locally transmitted cases.
Although imported cases remain a concern:
- On Wednesday, there were 67 new reported cases, up from 47 on Tuesday.
While the virus seems in check, the economy remains in the doldrums.
According to the Ministry of Industry and Information Technology (Xinhua):
- As of March 24, only 71.7% of small and medium-sized enterprises hadresumed operations.
Given that new data point, we now estimate that the economy is running at less than three-fourths normal levels:
- As of March 25, The Trivium National Business Activity Index shows the economy operating at 73.9% of pre-crisis levels.
Get smart: If China doesn’t get the economy rebooted quickly, the damage will be intense and long-lasting (see next entry).
2.The Q2 outlook
By now it is obvious that China’s economy was in a deep hole in Q1 2020.
The question for policymakers: Can the economy continue on its current resumption trajectory into Q2?
This is critical: The outlook for the 2020-2021 growth trajectory will largely hinge on the economy’s performance over the next three months.
Why’s that? Businesses will either continue to capitalize on, and reinforce, economic momentum throughout the year – or the losses will continue to compound if the economy gets stuck.
It’s difficult to make a definite growth forecast, but we’ve run the numbers and come up with the following scenarios:
- Continued business resumption in Q2 leads to real GDP growth of 2.9% in 2020.
- Businesses get stuck at 90% output in Q2, leading toreal GDP growth of 1% in 2020.
- Businesses get stuck at 80% output in Q2, leading to real GDP growth of -3.6% in 2020.
- Businesses get stuck at 80% output into Q3, leading toreal GDP growth of -7.4% in 2020.
Go deeper: Read our full client note, where we outline these scenarios in detail.
The good news: Policymakers seem to understand that Q2 is a crucial period and are acting to support consumption immediately (see entry #4).
The bottom line: Best-case scenario, China’s economy will see 2.9% GDP growth this year.
Trivium: Q1 recap, Q2 scenarios
3.PBoC looking to boost support
ICYMI: The COVID-19 outbreak caused a major contraction in China’s economy in Q1.
So far, China’s financial authorities have been highly targeted in theirresponse, but there are signs that officials are looking to gradually ramp up support.
Some context: Over the weekend, central bank (PBoC) vice governor Chen Yulu hinted that credit growth might soon accelerate (see March 24 Tip Sheet).
The latest: The Financial Times scoops that the PBOC is considering a cut to the interest rates that banks put on customer deposits.
Why it matters: A benchmark interest rate cut would be a step up for monetary support. The PBoC hasn’t cut those rates since October 2015.
And there’s more: China Banking News reports that state media is flagging more reserve requirement cuts for banks in coming months.
Get smart: The extreme nature of the economic contraction warrants an increase in monetary support.
But hold up: This still doesn’t translate to huge stimulus. All of these moves are geared toward relieving the pressure on banks, as they are on the front lines of supporting businesses.
The big picture: Stimulus, be it large-scale or targeted, comes at a cost to someone. There is no free lunch.
4.The urge to splurge
The Chinese government is encouraging people to go hogwild onspending sprees to get the economy back on track.
Some context: At its executive meeting on Tuesday, the State Council sought to promote online services to boostconsumption (see yesterday’s Tip Sheet).
A group of online and offline retailers have answered the nation’s call (Reuters):
- “GOME Retail Holdings Ltd…and Suning.com Co Ltd…plan to hand out over 620 million yuan ($88 million) worth of vouchers.”
- “Alipay is giving away 10 million discount tokens for 10,000 retailers on its app.”
- “JD.com Inc [said] it will give out 1.5 billion yuan ($212 million) worth of coupons for branded goods.”
Not to be outdone, city governments have been handing out retail vouchers to boost consumption:
- Ningbo, Hangzhou, and Jinan have forked over vouchers worth RMB 20 billion, RMB 300 million, and RMB 20 million, respectively.
Other local governments have thought up other creative solutions:
- The provinces of Zhejiang and Jiangxi as well as Longnan city in Gansu province have mandated a 2.5-day weekend.
Get smart: The central government isn’t confident that brick-and-mortar retail will lift the economy out of the doldrums. That’s why they’re banking on online retailers.
Reuters: Chinese consumers urged to splurge as economy begins path to normality
China Daily:Chinese cities launch voucher campaigns to boost epidemic-hit consumption
5.Local governments deal withhidden debt
21st Century Biz recently examined the progress local governments have made in disposing of implicit debt by looking into their 2020 work reports.
Some context: The government never reveals the size of implicit debt, but most estimates put it at RMB 30-40 trillion – more than twice that of explicit debt.
Their findings were positive.
Almost all provincial governments said they achieved their goal of reducing their debt in 2019. Some even overdelivered.
- Inner Mongolia disposed of 270% of its annual target.
- Ningxia shrank its existing debt by 22%.
But pressure to keep this momentum going in 2020 will be increasingly challenging as the government’s fiscal position continues to deteriorate (see yesterday’s Tip Sheet).
Going forward, the government will rely more on selling assets and debt swapping.
- Heilongjiang’s Finance Department will “use debt swap and debt extension to prevent hidden debt risk.”
- Tianjin’s Finance Department will “revitalize [government] resources, assets and funds, … to solve hidden debts.”
Case in point: The Tianjin government is selling equities in 19 local SOEs in March. These include local financial institutions.
Get smart: The implicit debt load is so big that the government will need years to address it all. For the moment, the government needs to stabilize most of it through refinancing.
21st Century Biz: 多省2019年化债任务超额完成 今年或通过置换、处置资产缓释风险
6.Xi and Merkel call for cooperation
On Wednesday, Xi Jinping placed a call to German Chancellor Angela Merkel to discuss (what else) the COVID-19 pandemic.
Some context: Over the last two weeks, Xi has called various foreign leaders each day to express support and offer medical aid and expertise (see yesterday’s Tip Sheet).
Xi expressed a desire for deeper Sino-German cooperation:
- “China is willing to share prevention, control and treatment experience with Germany, strengthen cooperation in vaccine and drug research and development, and contribute to the health and well-being of the two peoples and global public health and safety.”
- “Germany thanks China for its timely and valuable help and hopes to carry out scientific research cooperation with China in the areas of vaccine and drug research and development and other fields, so as to set an example of solidarity.”
Get smart: China has drastically stepped up its diplomatic outreach as COVID-19 continues to spread globally. So far, it’s been an effective strategy.
What to watch: An emergency video summit of the G20 is convening on Thursday to discuss the virus and the global response. Will China position itself as a leader in addressing the crisis?
Reuters:Germany’s Merkel, China’s Xi agree close cooperation on coronavirus