China GDP: Five things to watch after coronavirus

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The Chinese government will make history of the wrong sort on Friday, when it publishes its estimate for first-quarter gross domestic product in the midst of the global coronavirus pandemic. Most analysts expect the National Bureau of Statistics to reveal China’s first official year-on-year decline in economic output since 1976, the final year of Mao Zedong’s disastrous Cultural Revolution.

Here are five things to watch.

How big will the first-quarter decline be?

Analysts at the National University of Singapore’s East Asian Institute were among the first to predict a year-on-year decline in first quarter economic output, potentially by more than 6 per cent. Economists polled by Reuters have forecast a 6.5 per cent fall. Others have predicted declines of as much as 16 per cent. 

Is there any hope of avoiding another decline in the second quarter?

A second successive year-on-year fall in economic output during the three months through June would signal that the world’s second-largest economy was officially mired in recession — an unprecedented situation in the more than 40 years since China’s wildly successful “reform and opening” programme was launched, ending three decades of Maoist autarky.

Trade figures released on Tuesday by China’s Customs administration suggested that the economy might recover relatively quickly, with exports in March down 3.5 per cent year on year in renminbi terms compared with a 15.9 fall in the January-February period.

However, Customs officials cautioned that the March figures were flattered by delayed orders from January and February, when the epidemic was peaking in China.

It was also not clear until the end of March just how devastating the pandemic would prove to be in China’s largest export markets of North America and Europe. Over recent weeks, confirmed cases in the US and Europe’s five largest economies have all exceeded China’s official total of 83,607, forcing them to enact sweeping lockdowns that are still in effect.

The impact on China’s export sector is likely to be devastating, exceeding that of the global financial crisis in 2008-09.

Can the Chinese government rein in rising unemployment?

China’s official urban unemployment figure stood at a record high 6.2 per cent at the end of February, although officials are widely believed to routinely understate the real urban unemployment rate.

A continued rise in unemployment would pose a severe challenge to the government, which typically sets an annual urban job creation target of 10m or more new positions each year.

Premier Li Keqiang has said the government ultimately cares more about job creation than it does about its annual GDP growth target. In a State Council meeting earlier this week, he also noted that “the employment situation is dire for college graduates this year”.

Will Beijing have to target more of its relief measures at individuals and households, rather than companies?

In his first public tour of the front lines of China’s epidemic prevention work in early February, President Xi Jinping said there should be “no large-scale lay-offs”.

The government’s relief measures have focused on companies rather than individuals, including tax breaks totalling Rmb1.6tn ($227bn) and Rmb3.6tn in new liquidity that banks are supposed to lend to struggling companies, especially small and medium-sized enterprises that account for the majority of employment.

But this amounts to only about 5 per cent of annual GDP and the government’s power to direct bank lending and private sector hiring and firing decisions is limited. Ultimately, Mr Xi’s administration could be forced to consider some of the direct handouts to lower income households that have been adopted in the US and UK.

Is a bigger stimulus coming?

Terrible economic data on Friday could be the spur for bigger stimulus from the government and the People’s Bank of China.

Officials have been reluctant to try a repeat of their global financial crisis stimulus package, which was equivalent to 16 per cent of GDP and unleashed a credit-fuelled building boom that sent the country’s overall indebtedness level soaring.

The PBoC has also refrained from the bold interest rate cuts adopted over the past month by western central banks, but is signalling a shift to looser monetary policy. On Wednesday, it cut a key lending facility rate by 20 basis points — two days after a senior PBoC official said that “a gradual increase in macro leverage should be allowed”.

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