Way off plan

Covid-19 threatens China’s 10-year growth target


No growth, no big deal

It was the year that Steve Jobs founded Apple, Nadia Comaneci became the first gymnast to get a perfect score at the Olympics; and saw the release of the first of the Rocky films, launching the career of Sylvester Stallone.

More meaningfully for the Chinese, 1976 was also the year that Mao Zedong died, bringing an end to the Cultural Revolution and marking the beginnings of the recovery from a decade of chaos.

None of this got a mention on Monday from China’s National Bureau of Statistics when it released the economic data for the first two months of 2020. The numbers were truly shocking as the coronavirus outbreak dealt the blows, leading to warnings that the economy is heading for its first quarterly contraction since the year of Mao’s death.

Here’s a selection of the figures in the first two months of this year: factory production fell at the sharpest pace in three decades; retail sales dropped by a fifth; investment plunged about a quarter on the same period last year; and the jobless rate surged to 6.2% in February, up from 5.2% in December, hitting the highest levels since official records were published.

All of this indicates a “significantly sharper” drop than most had been predicting, admits Julia Wang, HSBC’s senior economist for Greater China. “We previously thought that the short, sharp pain of virus containment would be followed by an equally sharp growth recovery,” she said in a research note on Monday. “The possibility of that happening falls the longer the economy takes to get back on track.”

Three days earlier the People’s Bank of China had tried to get out ahead of the bad news, announcing a cut to the amount of cash banks have to hold as reserves. That is expected to release Rmb550 billion ($79 billion) into the banking system and help push down borrowing costs. The central bank has also been cutting interest rates since late January and it could order another reduction this month.

Mao Shengyong, a spokesman for the National Bureau of Statistics, did his best to put a more positive spin on the situation, claiming that the economic impact of the virus would be “short-term and manageable”.

He also had higher hopes for the economy in March, which traditionally makes more of the running in the first-quarter numbers. “It will mainly depend on March’s performance, since this month accounts for about 40% of the quarterly economy in the first quarter, and January and February combined account for 60%,” he added.

Even if domestic conditions start to show signs of stabilising, the problem is that the Covid-19 virus is now taking hold in many of the main markets for Chinese exports. The shocking slowdown overseas is going to be seen as a signal for how the pandemic could paralyse these nations as well, bringing the global economy to a shuddering halt.

At the very least Beijing must be rethinking its growth targets for the year, something that Li Keqiang, the country’s premier, was signposting last week with comments that “it’s not a big deal whether the economic growth rate is a bit higher or lower” as long as the job market is stable.

That will put pressure on the commitments from Chinese leaders to double the size of the economy from 2010 by the end of this year, and delivering on their promise of “a moderately prosperous society”.

Most commentators think it’s still unlikely that policymakers will repeat the kind of Rmb4 trillion ($586 billion) stimulus package seen in the aftermath of the 2008 global financial crisis because China’s debt levels have grown substantially since then and its foreign exchange reserves have fallen.

But that doesn’t mean that there won’t be more targeted efforts at reigniting the economy, with another big push into infrastructural investment, and a series of tax cuts intended to get consumers spending more and businesses investing again. “Having paid a heavy cost to contain Covid-19, Beijing’s macro policy support will now hold the key to the growth outcome for the rest of the year,” agrees HSBC’s Wang, saying that “the time to act is now” in getting the economy back on track.

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