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The real surprise from China’s growth slump

The real surprise from the poor economic data China released earlier this month is that Beijing did not fudge the numbers.

This is structurally positive for China’s economic development and asset markets. It seems to me that the authorities are preparing the market for a contraction in first- quarter 2020 growth. The A share market is discounting this now.

The growth slump

The data for January-February was poor and unprecedented. For the two months combined, the major macro indicators fell by more than 15% YoY (see table 1). Property and car sales, arguably the two biggest economic sectors, fell by more than 40% YoY.

Table 1: Summary of major indicators (growth in%)

Jan-Feb 2020
Dec 2019
Industrial output-13.5%6.9%
Fixed-asset investment (ytd)-24.5%5.4%
Retail sales-20.5%8.0%
Property investment (ytd)-16.3%9.9%

Source: Chinese government releases, BNPP AM (Asia)

Policy goal out-of-reach?

For 1Q20 growth, estimates range between 0% YoY and -10% YoY. Just last month, the most bearish market forecast was 2%YoY growth for 1Q20. Based on that worst-case scenario, I was projecting 5.6% YoY growth for this year, with a market-consensus V-shaped rebound from 2Q20 onwards.

Now if we take the average of the market’s 0% to -10% YoY forecast range, a 5% YoY contraction would almost guarantee that the goal of doubling real GDP from the 2010 level would be out of reach. If I use my original assumptions – 2Q20 6.9% YoY growth, 3Q 6.5% and 4Q 6.5% – full-year 2020 growth would come in at 4.1% YoY.

The policy implications

Chinese officials are still talking about “achieving development goals for the full year”. If Beijing, against all odds, relaxes its doubling-GDP policy goal, there would not be aggressive easing and growth would be allowed to fall by more than expected.

However, we will not know Beijing’s thoughts until the National People’s Congress (NPC) announcement. This has been postponed due to the coronavirus crisis until further notice.

The real surprise

Preparing the markets for an economic hard-landing in 1Q20, it appears Beijing has resisted the temptation to fudge the data. Instead, it reported numbers that were bad enough to be completely plausible.

The data indicates a roughly 40% YoY decline in economic activity. In fact, property sales volumes fell by 40% YoY and construction starts dropped by 45% in January-February. Transport activity was down by around 25% and coal consumption by around 50% in February.

Output by capital-intensive heavy industries such as steel, aluminium and semiconductors did not decline because these sectors do not require a lot of workers, and for technical reasons avoided completely shutting down their production processes.

Structurally positive transparency

Accepting bad economic data signals that China’s policymakers are not overly locked into predetermined political goals anymore and are prepared to be pragmatic.

Rather than playing down the extent of the economic damage from the Covid-19 outbreak, the strategy seems to have changed to emphasise the success of China’s recovery from such an unprecedented shock.


Also read

10 things you need to know about coronavirus and Chinese equities

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