Driving the Day
1. Getting out and about
Good news! The virus still looks under control within mainland China.
This morning, the National Health Commission (NHC) dropped the latest numbers for domestic COVID-19 cases.
On April 6 (NHC):
- There were 32 new confirmed cases;all were imported.
- There were also 30 new confirmed asymptomatic cases, of which nine were imported.
Saturday was Tomb-Sweeping Day in China and people looked to make the most of the three-day weekend and the stable public health situation:
- On Saturday, Huangshan Mountain Park in Anhui had to shut down when the tourist inflow exceeded the 20,000-person limit only hours after the park opened.
But according to the China Tourism Academy, a government affiliated think-tank, things are still far from normal on the tourism front (China.com):
- More than 43 million tourist trips took place nationwide during the three-day holiday. That’s down by 61.4% compared to last year.
- Tourism revenue clocked in at RMB 8.26 billion, down by 80.7%.
By contrast, the proportion of day trips increased as people tried to avoid spending the night away from home.
Get smart: Our on-the-ground observation is that restaurants and shopping malls are seeing an increase incustomersday by day– including us!
Chinese tourist sites packed as country comes out of lockdown, but experts say risk still high
2.SMEs shut their doors
If you’ve been reading the Tip Sheet, you already knew Q1 was rough, especially for SMEs.
Now there are numbers to back it up:
- Corporate registration data shows over 460,000 firms permanently closed in Q1.
That’s brutal. And it probably underestimates the extent of firm closures.
- A number of companies are trying to file for bankruptcy, but courts are refusing to hear their claims.
- Instead, courts are encouraging creditors to ride things out until the economy gets better.
New business registrations are way down too:
- 3.2 million new businesses were registered in Q1, down 29% y/y.
Of the new companies, a disproportionate number were based in major economic centers like Guangdong.
Get smart: There’s a reason that the government is trying to target its support measures at SMEs – they are the most vulnerable in a downturn.
The problem: Government measures to support SMEs are not very effective. The government has been trying to support them since late 2018 – with limited success.
3. PBoC cuts bank RRRs
On Friday, the central bank (PBoC) cut the reserve requirement ratio (RRR) for small banks by 1 percentage point.
- The cut applies to rural financial institutions and city commercial banks that operate in only one province.
- It will be carried out in two equal parts on April 15 and May 15.
- It will release around RMB 400 billion of liquidity.
Some context: This is a relatively small liquidity injection. A standard RRR cut releases twice as much liquidity.
Get smart: The PBoC’s primary preoccupation is getting cash to SMEs. Small banks are the biggest lenders to SMEs, so that’s where the liquidity is going.
And one more thing: The PBoC also cut the interest rate on banks’ excess reserves to 0.35% from 0.72%.
What does that mean? It effectively reduces the incentive for banks to stash extra cash in their accounts with the central bank – and encourages them to push the money out to needy companies.
What to watch: We are likely to see a cut to the PBoC’s medium-term lending facility (MLF), which in turn should serve to guide the benchmark loan prime rate (LPR) lower.
The upshot: See next entry.
4.More financial support on the way…
Friday’s cut to banks’ reserve requirement ratios (RRRs, see previous entry) didn’t come out of the blue – moves like this never do.
- The central bank wasted no time in responding.
Our take: We’ve noticed a step change in the urgency with which top policymakers are addressing the economic fallout of COVID-19.
Go deeper: We explain all this in our most recent macro note. Give it a read.
What to watch: Expect much more financial support to come.
- It’s still far from 2008/09-level stimulus. Economic support measures remain mostly targeted and geared toward helping SMEs and consumers – rather than juicing investment.
Get smart: As one thoughtful Tip Sheet reader recently pointed out to us, governments around the world have learned lessons from the policy response to the Global Financial Crisis.
- Developed economies are emphasizing size and speed of stimulus – which they didn’t do a decade ago.
- Meanwhile, China is looking to enact support measures that won’t cause a decade’s worth of debt hangover.
Trivium China: Stepping up policy support to save Q2
5.…but let’s not go crazy
Given the reserve requirement cut on Friday, central bank (PBoC) officials were looking to get out front of the story – explaining their policy thinking.
Key comments came from PBoC Vice Governor Liu Guoqiang, who underscored the balance that the central bank always has to strike – providing liquidity support without boosting inflation (Reuters):
- “China has ample policy tools to support growth, but it will tread warily in cutting the benchmark deposit rate due to elevated inflation and the potential impact on ordinary savers.”
Some context: In recent days, speculation has heated up that monetary officials would take out the big guns and cut interest rates that banks pay to savers.
- Liu’s comments poured cold water on that idea.
What it means: As we’ve said, officials are looking to up policy support, but only in ways that won’t exacerbate other medium-term issues – like inflation and the already high debt load.
Get smart: China’s path out of the crisis will be instructive for the recovery trajectory of other economies.
But, but, but: Thanks to a more consumer-oriented policy response, China won’t help to kickstart the global economy out of recession in the same way it did during the Global Financial Crisis.
6.A moment of silence
At 10:00 am on April 4, Xi Jinping led the nation in mourning for those who lost their lives during the COVID-19 epidemic.
The scene (Xinhua):
- “Xi, Li Keqiang, Li Zhanshu, Wang Yang, Wang Huning, Zhao Leji, Han Zheng and Wang Qishan, as well as other Party and state leaders, stood in silence in the Zhongnanhai leadership compound in Beijing, at 10:00 a.m. The commemoration lasted for three minutes.”
- “They had white flowers pinned to the [sic] chest and paid a silent tribute in front of a national flag, flying at half-mast outside the Huairen Hall.”
- “A black banner hung over the doorway of the hall, with white characters [reading] ‘deeply mourn for martyrs and compatriots who died in [the] COVID-19 outbreak.’”
Get smart: Our sense is that the memorial was appreciated by a sizeable portion of the citizenry. But there is still a desire for the Party to more explicitly acknowledge and address its shortcomings in the early days of the epidemic.
CPC People: 全国各地各族人民深切悼念抗击新冠肺炎疫情斗争牺牲烈士和逝世同胞
Xinhua: Xi Focus: Xi leads national mourning for lives lost to COVID-19
7.The spin war
On Monday, Chinese authorities released a detailed timeline of their response to the coronavirus epidemic.
Surprise, surprise: The timeline shows that authorities spared no effort to contain the virus and halt its spread.
On the same day, People’s Daily published an editorial decrying anti-Chinese sentiment worldwide:
- “As the coronavirus has spread, some with ulterior motives…have advanced a campaign of systematic defamation, bullying, discrimination, and even violence against ethnic Chinese and those of Asian descent.”
- “In the face of the epidemic, insightful people from all countries have repeatedly called for unity and cooperation and opposed discrimination and division.”
Some context: As new cases of COVID-19 taper off in China, Beijing has provided unprecedented levels of aid to other countries.
Even so, some foreign governments remain wary of China’s “mask diplomacy” (Asia Times):
- Among others, Josep Borrell, the EU’s foreign policy chief, criticized China’s “politics of generosity,”accusing Beijing of trying to sow division in Europe.
Get smart: China’s opaque political system engenders suspicion in most foreign countries. That makes it tough for China to gets its message heard favorably abroad.
Get smarter: The Party’s insistence on controlling the narrative makes even spontaneous outpourings of goodwill seem scripted and disingenuous.