What next for China’s economy after COVID-19?

What’s the outlook for the Chinese economy after the coronavirus? On the face of it, the numbers point to a marked slowdown. GDP growth fell by 6.8% in 1Q 2020, the worst performance the country has recorded in 40 years. In addition, China’s fiscal response to the virus has not been of the same magnitude as some other countries. For example, Germany has spent more 20% of its GDP on fiscal easing measures compared to less than 5% by China. 

Too cautious in fiscal easing?

Source: Dr. Yongding Yu, The Chinese Economy in 2020, China Expert Perspectives Webinar Series, 7th Credit Suisse China A-Shares Conference, 13 April 2020

But Dr. Yongding Yu, Academician of the Chinese Academy of Social Sciences and a former member of the Monetary Policy Committee of the People’s Bank of China (PBOC), is fairly optimistic about China’s economic performance for the rest of 2020. Firstly, he believes that China took the right approach to fiscal and monetary policy in the early stages of the coronavirus virus.

While COVID-19 is a global health crisis, Dr. Yu pointed out in his speech during the China Expert Perspectives Webinar Series at the 7th Credit Suisse China A-Shares Conference that from an economic perspective it is primarily a “supply side shock”. He added, “there is not much that monetary and fiscal policy can do except provide economic relief, when the priority is containing the outbreak.”

Importantly, his baseline forecast for China’s GDP growth in 2020 is 3.2% provided the following conditions are met: COVID-19 does not resurge in China; the economy is operating at full capacity; the pandemic is more or less contained worldwide; and China’s potential growth rate is 6%. His estimate is in line with Credit Suisse’s GDP growth forecast of 3.3%.

A recovery built on infrastructure

As with China’s response to the 2008 Global Financial Crisis, Dr. Yu expects infrastructure investment will be a major tool used by Beijing to stimulate the economy and suggests the level of investment in infrastructure may need to increase 20% to 30% in 2020, equal to CNY5-6 trillion or even more.

“The difference between 2008 and now is that the central government should pay the bill for infrastructure investment, rather than rely on local governments to fund it by borrowing through local government financing vehicles,” he argued.

Moreover, Dr. Dong Tao, Vice Chairman of Greater China Private Banking at Credit Suisse, told Conference participants that this new round of infrastructure investment will support future drivers of growth.

“Not only will we see investment in old infrastructure, but also in new infrastructure – such as data and smart infrastructure – that will dominate global competition in the future,” he said. 

Source: Credit Suisse, China Equity Strategy, Stronger headwind but plenty of policy tools, 8 April 2020

Balancing the budget

Despite the upbeat forecast, the Chinese government is still yet to announce its fiscal policy plans for the year. Dr. Tao believes the announcement will come during the National People’s Congress which is expected to take place in May, having been rescheduled from March due to the coronavirus. 

For Dr. Yu, a key question is whether Beijing will break with its self-imposed restriction on the size of the budget deficit.

“I am quite optimistic about the Chinese economy because there’s still lots of latitude for the government to stimulate growth. The thing we don’t know is whether the Chinese government has made up its mind to do so because having a 3% budget deficit-to-GDP ratio was seen as a non-starter,” he elaborated.

“This year, I think China’s budget deficit-to-GDP ratio should, and could, be significantly higher than 3%.” In 2019, the ratio was 2.8%. 

Consumption struggles to rebound

While China might be able to galvanize the supply side, it has less control over the demand side of the economy which is likely to remain subdued for some time to come, according to Dr. Tao. 

“The bad news is that private consumption has underperformed my expectations and perhaps the market’s expectations,” he said. 

“One of the key issues we see in China, which we will also see in the rest of the world later on, is that we have no real solution to the symptomless patient who does not have an apparent illness but is capable of spreading the virus to the other people. Without that being solved, private consumption can’t rebound significantly from the lockdown period.” 

According to a recent survey carried out by the Credit Suisse CQi team, consumers are still cautious on spending. Compared to February, consumers’ intention to dine out, travel, order food delivery or buy discretionary goods saw little change in late March and early April. 

Source: Credit Suisse, China Market Strategy: China Back to Spend 2: Recovery in better shape, 21 April 2020

Where next for the China-US relationship?

China also faces uncertainty over the future of its relationship with the US. The prospects will depend a lot on who wins the next US Presidential Election; and even then, the next few years are likely to have their challenges. At least that’s the contention of Dr. Cheng Li, Director and Senior Fellow at the Brookings Institution’s John L. Thornton China Center.

Dr. Li expects the odds of a new President taking up residence in the White House to be at around 70% to 75%. 

“Before the outbreak of COVID-19, I thought it was a bit more than 50%, but its significant impact on the US economy has increased the chances of a change of guard,” he said during the China Expert Perspectives Webinar Series at the 7th Credit Suisse China A-Shares Conference. 

According to Dr. Li, such a change of guard at the White House could bring greater international cooperation on important issues like climate change and public health, and ultimately offer China more opportunities for collaboration.

“I’m optimistic for the long-term outlook on China-US relations, which will ultimately adjust to a more stable framework and new mindset,” Dr. Li said at the Conference. 

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