The numbers were at the low end of the range of market expectations of -5% to -10%. But together with an expected negative effect from COVID-19’s global outbreak on second-quarter growth, China’s hope for a V-shaped recovery look to be seriously at risk of being derailed. Depending on Beijing’s policy priorities, which may be changing (see below), GDP may risk growing by less than 4% YoY in 2020.
There are two major risks to growth: 1) A possible second wave of the outbreak due to imported cases and local cross-infections as China lifts the lockdown restrictions, 2) a negative feedback effect on Chinese aggregate demand due to a global slowdown in coming months.
The unprecedented shutdown of normal economic activity across Europe, the US and a growing number of emerging markets looks certain to cause a drastic contraction in Chinese exports, with independent forecasters calling for a drop between 20% and 45% YoY in the second quarter.
Such a substantial decline would take between 4 and 8 percentage points off China’s growth in Q2, offsetting any domestic recovery and putting pressure on Beijing to ease policy more aggressively.
Notably, the outbreak became global about two months after it reared its head in China. It will likely last longer – into May/June 2020. This greatly changes the recovery dynamics for China, which was hoping for a strong rebound only a few weeks ago.
What will Beijing do?
If Beijing ramps up domestic demand significantly, as happened in 2009-2010 when falling export demand was largely offset by a huge wave of domestic investment activity, the ultimate damage of the export shock could be lessened substantially.
For example, if Beijing were to boost the infrastructure investment growth rate to 10% YoY in coming months (which would still be less than a quarter of the growth rate in previous bailout cycles), that would add at least 3 percentage points to second-quarter growth, significantly alleviating the export hit on GDP.
However, we need a big change in Beijing’s policy attitude for that.
Moving away from deleveraging
There are initial signs that the Chinese authorities may be caving in to the deflationary pressures from the impact of COVID-19 and the Sino-US trade war and relax their self-imposed policy constraints. Central bank officials have recently made it clear that the deleveraging policy was shelved for the time being.
The recent revival of shadow financing (see Exhibit 1) underscores this shift. Credit growth has started to pick up, with new credit surging by over RMB 5 trillion in March and the YoY growth rate of outstanding credit speeding up to 11.2%, marking the fastest pace in two years (see Exhibit 2). Increases in special bond issuance and a revival in shadow financing contributed to the recent credit rebound.
The outlook for Chinese stocks and bonds
Chinese bond yields and many lending rates are already at record lows. If the economy starts to normalise in coming months due to more aggressive policy easing, the interest rate/yield cycle in China may hit bottom soon.
Chinese equities have outperformed so far, and should continue to do so as long as the coronavirus outbreak in the rest of the world continues to worsen and as Beijing adds details to its recent set of (more aggressive) stimulus measures.
However, these measures look uninspiring compared with the international quantitative easing efforts. It looks likely that once the outbreak peaks, especially in the US and Europe, Chinese stocks may lose their edge.
Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients.
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Some emerging markets offer less security
than the majority of international developed markets. For this reason, services
for portfolio transactions, liquidation and conservation on behalf of funds
invested in emerging markets may carry greater risk.
 “Chi Flash: China’s Post-Coronavirus V-Shaped Growth Rebound”, 10 February 2020.