2020 Economy's Path Set This Month: China Goes Back to Work

With China reporting falling case growth outside of Hubei, attention has turned to the economy. The stakes are high for China and the global economy. Small setbacks in the coronavirus fight could trigger larger economic disruptions should workers and companies further delay opening. China's government is calling on "key" industries and projects to begin work ASAP: "employees of major projects and key projects must return to work on time and start work as soon as possible."

China only has a couple more weeks before the hit to economic growth becomes serious. A survey by Qinghua and Beida (linked below) estimates one-third of SMEs will run out of cash after one month. Nearly one-third already estimate the epidemic will reduce 2020 profits by 50 percent.

If China only faces minor bumps from here on out, look for inflation and a big bill coming in 2021. I posted an article on this topic last week: Inflation Coming? China Reverses Deleveraging Effort Amid Coronavirus Outbreak

Along the same lines, Bruegel: China’s Coronavirus will not lead to recession but to stimulus and even more debt

As such, we expect the quick policy reaction to avoid a sharp correction in growth so that the Party’s objective of income doubling can be achieved.. This means that 2020 growth for China may still hover around 5.7-5.5% but with dear consequences. Debt will continue to pile up, for corporates, for the government and even for households, as they are pushed to consume more durable goods with subsidies and discounts. More debt for an already highly indebted country like China can only mean lower potential growth than the road. In that regard, one could argue that the negative consequences of the coronavirus on the Chinese economy may be more medium term than immediate and the reason is simply the large stimulus which I expect will follow and, the unavoidable excessive leverage resulting from it.

If China needs credit levers to boost growth, it will lose ground in its deleveraging plans. As I always say when this inevitably happens: raise your long-term USDCNY target.

The government reports case growth is falling outside of Hubei.

iFeng: 国家卫健委：除湖北外省份确诊病例数下降幅度达42.8%

A total of 53 confirmed cases were reported from Hong Kong, Macao, and Taiwan, including 26 in the Hong Kong Special Administrative Region, 10 in the Macao Special Administrative Region, and 17 in Taiwan. The number of confirmed cases reported daily in provinces other than Hubei has dropped from 890 on February 3 to 509 on February 8, a decrease of 42.8%, which indicates that preventive and control measures such as joint prevention and control mechanisms and strict management are being implemented. Play a role.

Here's the State Council's message of "get back to work." A partial excerpt is below. The article also has discussion of virus prevention, pork production, and logistics.

iFeng: 不搞“一刀切”！湖北以外省份均已部署安排复工复产，口罩复工率更达73%

On February 9, the news from the joint prevention and control mechanism of the State Council announced that on the basis of doing a good job in epidemic prevention and control work, actively support related enterprises in necessities to promote the resumption of work and production, and lay a solid foundation for market supply. At the same time, in areas where the epidemic situation is not so serious, it is necessary to appropriately expand the scope of multi-format operations, and it is no longer possible for one-size fits all.

...The "Notice" requires that, in order to promote the orderly returning to work in batches in an orderly manner, it is necessary to co-ordinate the formulation of a classification and batch-wise resumption of production and resumption of production. In areas such as feed production, market circulation and sales that involve important national economy and people's livelihoods, the conditions must be guaranteed to promote the resumption of work and production immediately, and employees of major projects and key projects must return to work on time and start work as soon as possible.

Second, we must make every effort to ensure the organization of transportation. Railroads, civil aviation, etc. must coordinate transportation capacity to do key group transportation, and effectively reduce the risk of epidemic transmission.

...Sixth, we must accelerate the coordinated operation of the entire industry chain, establish a liaison system for key enterprises, coordinate and solve problems such as insufficient machinery, labor, and insufficient funds in a timely manner, and ensure the steady supply and guarantee of raw materials and important components.

Hubei's government intervened to keep the aquaculture industry going.

In response to the problem of feed shortage in Wuhan, Hubei, Kong Liang, deputy director of the Animal Husbandry and Veterinary Bureau of the Ministry of Agriculture and Rural Affairs, said that he has immediately coordinated the promotion of local feed enterprises in Hubei Province to resume production and help solve the problem of raw material shortage. Judging from the current situation, the problem of feed shortage in Hubei is being alleviated.

Looking at the situation across the country, Kong Liang introduced that with the gradual implementation of the state's documents on maintaining normal production and living order, the start-up and restart of production of feed enterprises across the country has accelerated significantly. According to the schedule, the current utilization rate of feed enterprises in the country has reached more than 50%, among which Guangdong, Shandong, Hunan and other feed provinces have reached 70% and some large group companies have more than 90%. At present, localities are actively organizing feed production and distribution to meet the demand for feed produced by the aquaculture industry.

An editorial in the 21st Century Herald says China can weather the storm, bit it also discusses an SME survey that shows the risk of an extended shutdown: 中国经济有足够的韧性应对疫情

The central bank's research shows that the impact of the epidemic on China's economy is temporary. For the time being, this epidemic coincides with the Spring Festival, which has affected tourism, catering, entertainment and other service industries. Extension of holidays and postponement of construction have affected industrial production and construction The industry will also have some impact. The central bank judges that the epidemic may cause disturbances to economic activity in the first quarter, but after the epidemic is under control, the economy will return to the vicinity of potential output relatively quickly. Compared with the 2003 SARS period that disrupted the economic growth in the second quarter of that year, the economy rebounded rapidly in the third quarter. Therefore, the central bank believes that after the epidemic eases, China's economy will stabilize rapidly, and consumption and investment delayed in the previous period will be released, and China's economy will have a compensatory recovery.

At present, the biggest impact on the economy is the resumption of work. The later the resumption of work, the greater the impact on the economy and enterprises. For the financial and fiscal departments, they can only deal with the downward pressure on the economy caused by delayed construction and solve the problem. Potential corporate survival dilemmas. Therefore, the scale of this policy is extremely flexible. Perhaps most of China can resume work on time to reduce losses and impacts. This does not require excessive assistance policies; it may be delayed too long, resulting in a market A long shutdown will require huge fiscal and monetary policy inputs to resolve the difficulties.

At present, the possibility of gradual resumption of work on time is getting higher and higher, and the influence of Wuhan and even the entire Hubei Province on the overall territory of the Chinese economy is limited. However, at least half a month of downtime has hit SMEs harder. According to a joint survey by Tsinghua University and Peking University, 29.58% of the 995 specimen companies estimate that the epidemic will cause the operating income to decline by more than 50% in 2020, and 28.47% of the companies are expected to reduce their operating income by 20% -50%; 34 % Of enterprises can only maintain cash flow for 1 month, 33.1% of enterprises can maintain 2 months, and 17.91% of enterprises can maintain 3 months.

The impact on small, medium and micro enterprises will bring small-scale but extensive credit risk, that is, the possible funding chain break of some SMEs, and the risk of personal defaults rising after income interruption due to business shutdown.

Despite the risk to SMEs, the editorial ends on a positive note:

We should not overestimate the impact of the epidemic on China's economy and overreact. In recent years, the economy has faced some new situations and new challenges every year. However, as the second largest economy in the world, the Chinese economy has shown strong resilience and potential. At the same time, its macro-control capabilities have been continuously improved. Therefore, the Chinese economy Can still steadily walk on the road of high-quality development. The impact of the epidemic should soon pass, and various efforts to supplement the shortcomings will continue to strengthen. The epidemic will only strengthen the immunity of the Chinese economy and make the economy more resilient.

Reported case growth all over the world was less than 10 percent on Saturday. Hopefully, the growth curve has been bent. The virus will linger for months yet, but if officials globally have gotten a handle on the situation, the worst may be over and far worse outcomes avoided. That said, it will still be a couple of weeks before we can be certain that outbreaks haven't occurred elsewhere. Africa, for instance, is only now receiving test kits. AP: We’re definitely not prepared’: Africa braces for new coronavirus