The Chinese economy rebounded in March but the recovery isn’t likely to endure in 2Q, says the Macropolo Outlook for the Dragon country. Liquidity crunch is pulling down the private sector, which accounts for more than half of China’s GDP. Cash flow constraints will force the Chinese private sector to scale back investment and hiring, and this would reinforce ‘a vicious cycle of deflation’, says the Macro Outlook 2Q2020. So its verdict: No Swift Recovery, Demand Remains Weak.
Other Observations
1. Beijing will be able to deal with the anticipated export drop with fiscal stimulus, but it will have difficulty reigniting domestic demand.
2. Beijing is likely to take more time to consider a medium-term strategy aimed at making growth more sustainable. It may be unveiled at the delayed National People’s Congress (NPC) in May.
3. The rebound in March was modest though better than Feb when it was abysmal.
4. Demand holds the key for swift recovery but it is not in sight yet. Result was the historic -6.8% GDP contraction in the first quarter.
Elaborating on its assessment that Chinese private sector in the dog house, the report avers that it is reeling under the impact of corona pandemic. It says the damage inflicted by the virus is like kicking private firms in the stomach while they’re already down. Because the 2018-19 slowdown has eroded private firms’ revenue flows. What compounded their plight? “Beijing’s response at the time was not proportionate to the scale of the challenge, even though it had sent some of the strongest signals in supporting the private sector”, says Houze Song, a research fellow at MacroPolo, who authored the report.
China is home to some 80 million private companies – big, small and micro. Only about one-third of them have received modest credit support so far. To provide sufficient credit to the remaining 50 million-plus businesses, that too quickly will be a tough proposition at the best of times. More so at the present juncture. How China will go about the task will determine the course of the graph. Houze Song report lends credence to the growing view that Beijing has a tough task. Because some private businesses have already used Beijing’s liquidity support to invest in property, directly undermining Beijing’s efforts to contain the property bubble.
While on job scene, the report presents a bleak picture. Only 20 per cent of the migrant workers have unemployment insurance cover. And the unemployment benefits are already paltry at just $200/month. State Council meeting in April announced expansion of the scheme as a social safety net to better cover migrant workers. But if the company owners begin to lay off workers as the immediate short cut to put their act together, it will have two negative fall –outs. One less inventory, less supplies and still lesser revenue flow. Weak consumer confidence will be a natural corollary.
While on policy responses, the Macro Outlook 2Q2020 say “It is reasonable to expect Beijing to more or less offset the direct impact of the export decline on aggregate demand and to halt deflationary trends.” Its forecast: “General policy direction in 2Q will be mainly aimed at preventing a double dip in growth rather than juicing growth.”
Fiscal stimulus will make only a modest contribution to growth in 2Q. Beijing announced on April 20 another $140 billion (1 trillion yuan) of local government borrowing but it will barely able to support a small 5% y/y growth in fiscal spending in 2Q. This is because revenue is going south- 26 per cent down in March itself.
As Houze Song says in his report, how China will come to grips in the medium term with the unfolding situation in the absence of a robust economy wide stimulus will become clear once the National People’s Congress deliberates and clears a road map.
—————by Rama Rao Malladi