China Economic Update: March 2020

Data highlights the huge toll of Coronavirus countermeasures.

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  • Chinese authorities introduced a range of measures to control the spread of the Coronavirus across the country. These included travel restrictions, business closures and quarantines that substantially disrupted normal activity. While surveys ahead of today’s data anticipated declines in the key measures, these surveys failed to predict the extent of the plunges in industrial production, investment and retail sales (down by 13.5% yoy, 24.5% yoy and 20.5% yoy respectively). Although the countermeasures have clearly taken a heavy toll on China’s economy, they appear to have been relatively successful in slowing the transmission of the virus – with new cases slowing significantly from early March.
  • In this month’s Forward View – Global, we revised down our forecast for China’s annual growth to 4.8% in 2020 (previously 5.4%). The resumption of normal activity should provide a boost to annual growth in 2021 – forecast at 6.1% (up from 5.8% previously). However, there remains uncertainty around the duration and scale of the downturn related to the Coronavirus countermeasures, along with the impact on the demand for Chinese exports (given the spread of the Coronavirus beyond China). Given the scale of the declines seen in the first two months, and the seemingly slow recovery in March (even as various provinces have reduced their emergency restrictions), there remains downside risk to our forecast.
  • The People’s Bank of China (PBoC) has taken a range of actions to support the recovery in economic activity – as restrictions imposed to control the spread of the Coronavirus are gradually eased. Liquidity injections have pushed down interbank rates – with the 7 day Shanghai Interbank Offered Rate (Shibor) falling to its lowest levels since the brief dip in early July 2019.
  • In addition, the PBoC announced cuts to the Required Reserve Ratio (RRR) of between 50 and 100 basis points for eligible banks (that meet lending targets to SME and private firms). This is estimated to release around RMB 550 billion for bank lending. The benchmark Loan Prime Rate was cut by 10 basis points on 20 February to 4.05%. Easing monetary policy globally may provide impetus for further cuts in coming months.

For further details, please see the China Economic Update – March 2020