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As China began to put COVID-19 behind it, the outbreak escalated globally. Chinese factories and businesses gradually restarted their operations in March as the speed of infection began to slow, but the worldwide spread of the virus means China now faces a large negative trade shock.

We expect exports to contract markedly through the third quarter of 2020, not rebounding until the first half of next year. We forecast that export volumes will contract by 5.8 per cent in 2020 and imports by 4.6 per cent. The collapse in oil prices will likely shrink China’s imports even more in value terms.

We have thus shaved our growth forecast for 2020 to just 3.0 per cent – half last year’s level – with GDP shrinking by about 5.5 per cent year-on-year in the first quarter but the sharpest fall will be in the next quarter before a 5.9 per cent recovery in the third quarter and overshooting to 7.0 per cent in the final three months.

However, the scale of the business, and labour market underutilisation this implies, raises risks of longer-lasting damage to the productive capacity of China’s economy. Uncertainty remains high and there is also the danger of negative feedback to economic growth.

The strong measures unveiled to contain COVID-19 have hit both demand and supply in mainland China. Industrial production contracted by 13.5 per cent year-on-year in the first two months of 2020 while the output index of commercial services dropped by 13.0 per cent.

On the demand side, the value of fixed asset investment shrank by 24.5 per cent and retail sales by 20.5 per cent year-on-year. That gap between supply and demand suggests a build-up of inventories.

Economy activity was probably back to 70-80 per cent of pre-outbreak levels by the end of the first quarter, but with significant variation across sectors. Industry, especially utilities and metals, saw a faster resumption than construction or consumer services.

The recovery will be partly on the back of further policy easing by Beijing. We expect policymakers to accelerate measures such as credit and cashflow support for businesses, debt relief, regulatory flexibility, plus monetary measures, including interest rate cuts.

After a RMB650 billion (USD92 billion) social-security tax exemption, we foresee further labour-market stabilisation policies such as incentives for businesses to retain staff, the provision of training and job-search services, and benefits for unemployed workers. Some local governments have used ‘consumption vouchers’ to support the hard-hit retail and service sectors.

Beijing is also expected to raise its annual fiscal deficit target to 3 per cent or higher to allow for a 1 to 2 trillion renminbi targeted tax cut for businesses, financed partly by additional bond issuance. But China’s relatively abundant fiscal reserve means Beijing has the policy levers to boost growth through consumption, the property market or industry.

First published 23 March 2020.

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