On February 3, during a meeting of the Politburo’s Standing Committee, Xi Jinping told Party members that efforts to control the spread of coronavirus were overdone and advised local officials to avoid “more restrictive measures”.
That’s according to a pair of sources cited by Reuters.
Specifically, the retelling of the meeting suggests Xi believes measures including the shuttering of some public schools and factories, the curtailment of transportation routes and lockdowns imposed at residential compounds aren’t constructive and may be doing more harm than good by stoking fear among the populace.
Xi is, of course, concerned about the economy, which was already growing at the slowest pace in decades even before the virus hit.
Estimates vary, but, in a note out last week, Nomura’s Chief China Economist Ting Lu posited five possible trajectories that give you an idea of how dramatic (or not) the damage could be. Here is the summary paragraph and table from the longer note for anyone who missed it:
In all scenarios, we envisage a short-term growth slump followed by a V-shape recovery, driven by strong pent-up demand. The only difference lies in the scale of the growth slump and the timing of recovery. In the five scenarios, Q1 growth drops to 3.8%, 2.5%, 2.0%, 1.0% and 1.0%, respectively, from 6.0% in Q4 2019 but, thanks to the expected recoveries after the nCoV-related lockdowns end, annual GDP growth in the five scenarios slows to 5.6%, 5.3%, 4.8%, 4.2% and 3.9%, respectively in 2020, from 6.1% last year. Year-on-year growth could surge in Q1 2021 on a low comparison base. We revise down our real GDP growth forecast for Q1 and full-year 2020 to 3.8% and 5.6%, respectively, from 5.8% and 5.7%, as we assign the highest probability to the “good” scenario.
Although the PBoC has rolled out measures aimed at providing monetary policy support, and while new tax policies may help, none of that will matter if industry remains shut-in and commerce grinds to a halt.
In Zhejiang province on Monday, local officials were told not to close “shops of chain stores and convenience stores that sell daily necessities such as vegetables, cooking oil as well as meat, eggs and dairy products”. That’s according to a government release.
“Chinese retail and associated services have felt the immediate brunt of the virus”, ING said Thursday, in an e-mailed note. “From shops to restaurants, a lack of footfall is hitting sales, while a sharp fall in inbound tourism will also take its toll”.
On Tuesday, Beijing said regions not hard-hit by the epidemic should get back to work. The government didn’t quite put it that way, but the Party is angling for a ramp-up in industrial output after weeks of containment efforts effectively shut down the world’s second largest economy. The Ministry of Industry and Information Technology called the resumption of industrial production “very urgent”.
The Finance Ministry said Tuesday that local governments will be allowed to sell an additional 848 billion yuan in debt over the next two months. 290 billion of that is earmarked for “special debt”, normally reserved for infrastructure. Hopefully, this won’t worsen what is already an absurdly complex web of cross-holdings tied to China’s local government debt pile.
Read more: Mind-Boggling Local Government Debt Dynamics Should Probably Worry China Watchers In 2020
The virus death toll passed 1,000 today, and confirmed cases are now at 42,638. There are, apparently, signs that the spread is abating in and around the epicenter. Top officials in Hubei were removed.
Once the virus runs its course, the effects of China’s economic slowdown for the rest of the world will linger.
The outlook committee for the country’s agriculture ministry said Tuesday the outbreak might delay China’s farm purchases of US goods under the trade deal. They will probably be fulfilled by the end of the year – probably.
“What we find complacent is the idea among some market participants that Chinese economic weakness will have limited repercussions for the rest of the world”, JPMorgan said, in a note dated Friday, adding the following:
The importance of China today is much greater than in the past not only because China’s share in the world economy is three times bigger than at the time of the SARS outbreak in 2003, but more importantly because China plays today a central role in the supply chains of several industries such as autos, electronics, pharmaceuticals, machinery. So any delay in Chinese factory re-openings beyond next week would not only be detrimental for Chinese GDP growth in the current quarter, but it could also disrupt global supply chains and hit production outside China.
ING echoes those sentiments. “As time goes on, supply chain disruption will become a bigger concern globally”, they warn. “China is much more integrated into the global economy than it was back in 2003 when the SARS virus hit [and] a sustained drop in Chinese production of electrical components could quickly cause knock-on effects elsewhere”.
‘In the five scenarios, Q1 growth drops to 3.8%, 2.5%, 2.0%, 1.0% and 1.0%’ Does anyone else find it utterly absurd that not one of the envisaged scenarios assumes economic contraction? Vast swathes of the country are on lockdown and the worst possible outcome is 1% growth. idiots.
Not sure you understand how this works. China isn’t going to report an economic contraction. They’d sooner just make the numbers up. Also, do you have evidence (i.e., a model) that you want to share with readers for your contention? Please let us know if you have actual data based on your projections of the percentage of industrial output shut-in in provinces hardest hit and also on those provinces’ traditional contribution to overall Chinese GDP growth. Because I can assure you that the banks do have that data and those models. Your “idiots” characterization is baseless.
Interesting, and I agree; I’m not sure I understand how this works. I’m aware of the skepticism around the data published by China, but are you saying that the bank models need to reflect that the Chinese government would never admit to an economic contraction and so would never model for one? At the risk of looking extremely naive, I didn’t realise that the analyst community was so corrupted.
As for my models, you got me. In a situation like this with so many unknowns, I think about things rather simply. For economic growth to take place requires the same level of economic activity in the prior period and then some more. So when I see schools and factories across the country closed for extended periods, several borders closed and the streets empty, I simply wonder whether it might be possible that matching last year’s economic activity (and then some more) could be a challenge.
It’s not a matter of “corruption”. 1% quarterly GDP growth from China would represent a veritable collapse versus Q4’s reported growth rate. So it’s not as if 1% is some kind of rosy scenario. It would represent an economic calamity, even as it will be swiftly recouped, once the virus impact fades.
But my broader point is simply this: The internet has become a place where people get to assert, without any evidence beyond the anecdotal, that experts are “idiots”. I can’t control that on Twitter, etc., but I can control it here. Below is the resume of the man you called an “idiot” this morning. My guess is, your credentials when it comes to projecting the prospective hit to Chinese GDP from a virus fall a bit short by comparison.
And to anyone who would suggest I’m being too harsh on readers, I would ask you this: Where is the accountability from commenters online? Why can people now say whatever they want up to and including slandering professionals they don’t know without any evidence or cause? It won’t happen in these pages. That’s not the kind of site I want to run.
As an economist, Dr. Lu has been top ranked in many surveys including No.1 in Institutional Investor’s All-Asia surveys in 2013, 2014 and 2015. While at Huatai, he helped build the research, equity sales and trading teams in Hong Kong, and significantly improved the company’s research and sales teams in Mainland China. This contributed to Huatai’s 4th and 5th rankings in the 2017 Institutional Investors All-China Research and Sales Teams surveys, the highest rankings ever achieved by a Chinese securities house.
Dr. Lu holds a PhD in Economics from the University of California, Berkeley, and MA and BA in Economics from Peking University. He’s also a CFA Charter holder.
The irony, of course, is that this commenter may ultimately be correct.
But it won’t be because anyone is an “idiot.” Needless derision of people trying to do their jobs isn’t the answer to anything.
You’re right about the derision, in this case and more generally. It wasn’t appropriate and I’m glad you called me out on it.
I beg to differ on the point of ‘corruption’. If the analyst community is projecting what they think China will report, rather than what they think it will actually be, that is clearly a corrupted process. You can argue TINA of course, but you can’t argue that it’s right.
Still confident on this prediction, H?
There’s no real “prediction” in there. I don’t think they’re likely to report a contraction or if they do, they’ll figure out some way to spin the messaging.
But if you’ve read any of the Bloomberg stories on this over the past two days, you know they’re doing things like running factory equipment at full-tilt with nobody actually in the factories to boost electricity consumption.
That’s the kind of thing I’m talking about.
Also, I strongly encourage you to avoid trolling me on my own website, which is what you’re doing here.
You don’t have a habit of that based on a quick scan of your comment history, but, as noted above, sarcastic derision of people with PhDs isn’t welcome and, ultimately, won’t be tolerated.
If you’ve got models you’d like to share, by all means, upload them to Google Docs/Sheets and share a link with us.
Analysts are doing their best to model this based on incoming information and their best efforts. You, on the other hand, are sniping at them randomly on internet comment sections.
You can’t do that here. Sorry. That’s not how Heisenberg Report works. If you want to take cheap shots at analysts, go somewhere else.
I report things as I see them and as I can verify them. I do not randomly speculate about anything, let alone about what a command economy, run by an autocrat “can” and “can’t” report.
To suggest that any force on this planet (biological or otherwise) is going to effectively instruct Xi Jinping on whether he is or isn’t compelled to admit to a quarterly contraction is absurd.
He might. Or he might not. He’ll make that decision not based on the economy, but based on what he thinks is expedient weighing a number of factors, both economic and political.
What we do know is that Xi will report whatever number he damn well pleases, and you, me, analysts, economists, viruses, and markets alike will all just have to swallow it.
Does that answer your question?
OK, thank you for the response and, importantly, message understood. You are comfortably the best writer in your field, so while I thought I’d point out that your earlier prediction (sorry I didn’t have a better word for it) was now looking a little less assured given last week’s data release, I had zero intention of causing offence in doing so. I don’t pretend to have a crystal ball and I don’t expect anyone else to either. If you’re familiar with the phrase ‘cheeky banter’ please know that that’s what I was gunning for. I won’t make the same mistake again.
We are seeing a spike in China inflation due to scarcity. I suspect that could occur, temporarily at least, globally as well. Would CBs react to that kind of inflation? Or just keep the spigots open?
Thanks for another very informative article, Mr. H.
@ B-Flat: excellent question, my guess is, considering the upcoming “policy review”, FED and ECB will look through these “transitory” effects and keep policy unchanged.
There is also an excellent article from the Macro Tourist on the inflation topic in these pages:
“They’re Gonna Let ‘Er Run Hot”. Search for it, it’s worth a read.
Seems everyone is wanting to forget lessons from “Public Opinion and Propaganda”…Anyone who assumes that someone else has fact based accurate projections ( irregardless of their academic standing) is likely mistaken…We are on the cusp of a relative unknown here……..
My 2 cents: The Chinese govt is under-reporting cases and deaths, maybe by 10X, but they have a good idea what the real numbers are. They also know the economic and health impact – which is huge – of continuing the shutdown. They have also now been able to prepare the rest of China for the spread of nCov, meaning surveillance, testing, treatment, so they have some level of confidence that the chaos/mismanagement in Wuhan won’t be repeated in Shenzen or Shanghai. Weighing all this, they feel the best (or least worst) decision is to get the higher reward and lower risk parts of the broad economy up and running. Food distribution and pharmaceutical production, financial ad technology companies, electronics manufacture and shipping, getting these operations running is worth the risk (they think). I’ll bet you won’t see movie theaters, shopping malls and large sporting events coming back as quickly. If they start seeing large outbreaks of disease in the restarted operations, they are probably prepared to change course.
I know a few actual financial China hands over in Hong Kong, but they’re probably reading nothing better than therealheisenberg already has. They are scared at best, (more of this year’s financial prospects) but half of them are looking to leave anyway.
I do have long-time contacts in china proper in the Greater Pearl Delta area and a few cities beyond.
According to them no one is going out. One person per household is permitted to leave their residence every two days to get groceries and basic supplies. No one is allowed in a grocery store without a mask. They have all asked if I could ship them more masks as none can be found there. There doesn’t appear to be an easy black market for masks and medical supplies because you can sell something for an inflated price, but then you would likely be turned in. Everyone believes anyone would turn them in.
All the restaurants are closed by order. Despite the headlines, basically any public gathering other than for work is banned. All consumer shopping appears to be closed. Only certain types of work are allowed. The schools are closed. One my friends closed his restaurant permanently. It had already been temporarily closed due to the drop off in consumer spending that everyone over there seemed to notice by last November, but this just killed it. It was in a nice mall in next to the Walmart in Dongguan (Across from Starbucks).
I have believed for years, as I’m sure everyone here believes as well, that the PRC’s economic numbers are mainly political. There is underlying growth, it is fairly consistent, but it’s rarely been what the actual reported number is. (I am bolstered in this belief by knowing some people that have help make those numbers up. ‘They have to good! But not tooo good.)
I’m certain the numbers of infected and dead are similarly political. I’m sure there are technical constraints as well just as with economic numbers, but they exist to support a narrative that is acceptable to the leadership. As facts on the ground change we’ll see some somersaults by the leadership to fit whatever evolving narrative they decide works best for them.
I did not believe any of the wild eyed reports on conspiracy websites. I hate how they take information any skew it toward the most panicky interpretation whenever possible. However, yesterday a close friend of mine in the defense/intel area who watches China linked me to the ‘SO2 plume’ story that originated with satellite pics of SO2 plumes originating in Chongqing and Wuhan. I actually countered that surely there were other plausible explanations other than the ‘dead bodies’ story. He simply answered that he did know their crematoriums were running non-stop. He actually felt it was a plausible story.
(Please forgive the vagueness of identification of my friend, while making this story vastly more plausible to me I understand how cheap seemingly random assignments of putative authority make a statement like that appear. I wish I could do better, I guess you’ll have to take it or leave it.)
I believe it will be a difficult first quarter for China whatever the GDP posted.