China's economy skids as coronavirus paralyses industries, households; factory production plunges at sharpest pace in 30 years

Beijing: China’s factory production plunged at the sharpest pace in 30 years in the first two months of the year as the fast-spreading coronavirus and strict containment measures severely disrupted the world’s second-largest economy.

Urban investment and retail sales also fell sharply and for the first time on record, reinforcing views that the epidemic may have cut China’s growth by half in the first quarter and that authorities will need to do more to restore growth.

Industrial output fell by a much larger-than-expected 13.5 percent in January-February from the same period a year earlier, data from the National Bureau of Statistics (NBS) showed on Monday. That was the weakest reading since January 1990 when Reuters records started, and a sharp reversal of the 6.9 percent growth in December. The median forecast of analysts polled by Reuters was for a rise of 1.5 percent, though estimates varied widely.

“Judging by the data, the shock to China’s economic activity from the coronavirus epidemic is greater than the global financial crisis,” said Zhang Yi, chief economist at Zhonghai Shengrong Capital Management.

 Chinas economy skids as coronavirus paralyses industries, households; factory production plunges at sharpest pace in 30 years

Representational image of Chinese workers. Reuters

“These data suggest a small contraction in the first-quarter economy is a high probability event. Government policies would need to be focused on preventing large-scale bankruptcies and unemployment.”

The dire batch of official economic data on Monday also showed a shocking declines in the retail and property sectors.

Fixed asset investment fell 24.5 percent year-on-year, dashing forecasts for a 2.8 percent rise and skidding from the 5.4 percent growth in the prior period. Private sector investment dived 26.4 percent from a year earlier.

Retail sales shrank 20.5 percent on-year, compared with a rise of 0.8 percent tipped by analysts and 8 percent growth in December as consumers shunned crowded places like shopping malls, restaurants and movie theatres.

China’s jobless rate rose to 6.2 percent in February, compared with 5.2 percent in December and the highest since the official records were published.

While officials say the epidemic’s peak in China had passed, analysts warn it could take months before the economy returns to normal. The fast spread of the virus around the world is also sparking fears of a global recession that would dampen demand for Chinese goods.

Speedy recovery?

The NBS in a statement on Monday said the impact from the coronavirus epidemic is controllable and short-term and authorities would strengthen policy to restore economic and social order.

Mainland China has seen an overall drop in new coronavirus infections, but major cities such as Beijing and Shanghai continued to wrestle with cases involving infected travellers arriving from abroad, which could undermine China’s virus fighting efforts.

“While domestic conditions should improve slowly in the coming months, the mounting global disruption from the coronavirus will hold back the pace of recovery,” said Julian Evans-Pritchard, Senior China Economist at Capital Economics.

Prior to a significant deterioration in the virus, analysts had predicted a rapid V-shaped recovery for China’s economy, similar to that seen after the SARS epidemic in 2003-2004.

However, the outbreak escalated just as many businesses were closing for the long Lunar New Year holidays in late January, and widespread restrictions on transportation and personal travel, as well as mass quarantine, delayed their reopening for weeks.

Both exports and imports fell in the first two months from a year earlier, while slumping demand pushed factory prices back into deflation.

Factories may not be back to full output until April, some analysts estimate, and consumer confidence may take even longer to recover.

The pain in the industrial sector was also seen in China’s real estate market.

Property investment fell at its fastest pace on record while home prices stalled for the first time in nearly five years.

Despite those numbers, NBS spokesman Mao Shengyong said short-term policies to support the property market were not among the government’s broad swathe of stimulus options.

More support measures

Authorities have been ramping up support since the virus outbreak escalated, with most aimed at helping cash-starved companies stay afloat until conditions improve.

Other major global economies have more recently unleashed a wave of stimulus to prop up growth and ensure financial stability.

China’s central bank said on Friday it was cutting the amount of cash that banks must hold as reserves (RRR) for the second time this year, releasing another 550 billion yuan ($78.82 billion) to push down borrowing costs.

Mao from the NBS told reporters after the data release there is room for China to appropriately raise budget deficit ratio this year, and Beijing would expand effective investment to cope with the economic downward pressure.

China has cut several key interest rates since late January, and some analysts are expecting another reduction in its benchmark lending rate this week.

It has also urged lenders to extend cheap loans to the worst-hit firms and tolerate late payments, though analysts note that will likely saddle banks with more bad loans.

The government has also announced fiscal support measures, including more funding for the virus fight, tax waivers, cuts in social insurance fees and subsidies for firms.

“I’m worried about the small firms. The pressure of rent remains a problem and tax waivers don’t mean much, as there’s no revenues,” said Hua Changchun, chief economist at Guotai Junan Securities.

“If Q1 GDP growth turns negative, there would be huge pressure to achieve the full year target, unless we can have a 8 percent-10 percent of GDP growth in the second quarter.”

Updated Date: Mar 16, 2020 13:18:05 IST

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