IT IS NO surprise to learn that China’s economy contracted in the first quarter as a result of the coronavirus outbreak. The officially announced GDP figure for January to March of a 6.8% year-on-year contraction is slightly worse than the consensus forecasts of 6.5%. but by no means as bad as some of the darkest forecasts.
It is the first contraction since the National Bureau of Statistics adopted quarterly reporting in 1992, and it negates the 6% expansion reported in the previous set of GDP figures at the end of last year. But so exceptional have been recent circumstances that there is little store to be put in such comparisons.
Retail sales and fixed asset investment both fell 16% in the first quarter as the lockdown took hold. Industrial production and exports all but came to a halt.
The questions for authorities now are what pace of recovery can be generated, what measures are needed to bring that about, and what are the risks in getting it wrong.
There are signs that the country is getting back to work. Factory output in March was down just 1.1% as manufacturing restarted, but, as that figure suggests, it is still well below full capacity. Goods exports fell by 6.6% year-on-year in March in dollar terms, having lost 17.2% year-on-year in January and February together. With the rest of the world still confronting the pandemic, global demand will be weak for some time, offering dull prospects for Chinese exports, although there is also opportunity to grab market share while rivals are incapacitated.
There is political risk in that for Beijing if Chinese companies are seen to be dumping their excess production capacity abroad at rock-bottom prices and taking advantage of still ailing economies elsewhere. The Trump administration in the United States is already on high alert for that, especially in the strategic sectors identified in Made in China 2025. More broadly a resumption of the US-China trade war remains a persistent and unpredictable risk.
Authorities have already put in place fiscal stimulus and kept monetary conditions loose to ensure ample liquidity in the economy so banks can help private businesses stay afloat. The unemployment rate of 5.9% in March, although slightly better than February’s all-time high of 6.2%, shows the need for that.
The risk to social stability in the face of joblessness is a perennial concern for the leadership. The China Labour Bulletin, a non-governmental organisation, has reported protests over wage arrears in various parts of the country this month. Earlier this month, Wuhan market stallholders staged a protest to demand rent relief for the time the lockdown left them unable to operate. Similar demonstrations took place in Hunan province at the end of March.
More are likely. Targetted relief to defuse such pent-up discontent is expected.
Large-scale infrastructure investment is not. Government and corporate debt have increased alarmingly as the pandemic has put on hold the deleveraging campaign that authorities have conducted since 2016. Now many more companies are struggling to refinance their debt. Corporate bond defaults seem sure to increase, especially in retail and leisure, travel and tourism.
Beijing may well have to reinstate the implicit state guarantee temporarily for non-systemically-important firms as it cannot risk a mass of defaults by smaller firms threatening the financial system. China has the capacity, economically and politically, to contain systemic risk, and its semi-isolation from the international financial system limits the spillover possibility.
However, the People’s Bank of China has already said that it will tolerate a small rise in bad loans. ‘Small’ might turn out to be much larger than initially intended.
If there is a silver lining to all this, it is that it may make it easier to achieve the government’s goal of slowing the economy to a sustainable long-term growth rate. The National Bureau of Statistics’ spokesman announcing the first-quarter contraction also said that average annual growth over the next two years was forecast to be about 5%.
That is in line with the Asian Development Bank’s forecast of 2.3% GDP growth for this year as a whole and 7.3% growth in 2021 and probably close to where planners would have liked the economy to be by the end of next year. The trick will be to get there smoothly.