23 March 2020

Chinese authorities have told the world that COVID-19 has been contained inside China. Rules about isolation are being loosened – even in Wuhan – as the number of new cases diminishes. The number of cases outside the core areas around Wuhan remain small, because the policies of quarantines and draconian travel restrictions have succeeded in preventing new cases in the rest of China. Big cities like Shanghai and Hong Kong have set excellent examples of how to handle a pandemic, because their leaders were smart enough to listen to the experts and to act decisively very early on. Examples of this decisiveness include welding doors shut on apartment blocks.

China has stopped the spread of COVID-19 by stopping the Chinese economy. Activity has been forcibly cut back, according to official Chinese statistics for the two months January and February (compared to the same period in 2019):

  • Retail sales slipped 20.5%
  • Industrial production dropped 13.5%
  • Electricity consumption declined 7.8%
  • Exports fell 17%
  • The services sector shrank by 13%
  • Housing sales slid 40%
  • New housing sales contracted by 45%.

According to the National Business Activity Indicator published by the China consultants Trivium, on 18 March the Chinese economy was operating at 71.5% of typical output. The next challenge for the Chinese leadership is to get the economy up near 100% of capacity without setting off a new round of infections.

This means getting the workforce back to work. The central, provincial, and local governments have to free up travel restrictions so as to allow the 200 million-plus migrant workers to leave their rural villages in the hinterland and head back to their factories in the eastern and southern coastal provinces. The trucking industry, for example, is currently functioning at less than half of capacity because most drivers are semi-independent operators who went back to their home villages for the Chinese New Year festival.

After that, the leadership has to encourage China’s consumers to start spending again. This means that people have to get used to taking the risk of going to shopping centres, eating in restaurants, and generally getting close to other people. The recovery will not be quick, because many people do not drop their fears overnight. The GDP lost in the last two months will not all flow back later in the year: expenditure foregone in one quarter does not all turn into pent-up demand, and – most importantly – the enforced isolations and business closures have slashed the incomes of many people, as well as using up household savings and pushing many firms to the edge of insolvency.

The Chinese authorities are committed to assisting businesses to re-start, but they will do so by means of targeted fiscal interventions, not by massive stimulus packages. The leadership has learned its lessons from past policy failures: for example, that rate cuts and credit creation do not flow to small and medium enterprises, and that surges in infrastructure spending only create “bridges to nowhere” and stimulate official corruption. One thing the authorities are still restricting is inbound international travel – they don’t want “disease-ridden foreigners” reinfecting healthy Chinese communists.

All this is good news for the global economy and global markets for two reasons. The first is that the Chinese disruption to global supply chains should be over by mid-year, once China is back at work. The second is that China’s negative impact on global GDP will be limited to the first half. In the unlikely event that China’s statisticians will be allowed to tell the truth, we expect CY2020 GDP to fall to 2.3%, compared to 6.1% in 2019. Our 3.3% forecast assumes that the March quarter is negative 7%, the June quarter is positive 4%, and the rest of the year is 6.0% annualized.


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