Emerging

Is the worst over?

EcoEmerging// 2nd quarter 2020  
3
economic-research.bnpparibas.com  
China  
Is the worst over?  
China’s population and its economy were the first to be struck by the coronavirus epidemic. Activity contracted abruptly during the  
month of February before rebounding thereafter at a very gradual pace. Although the situation on the supply side is expected to  
return to normal in Q2, the demand shock will persist. Domestic investment and consumption will suffer from the effects of lost  
household and corporate revenues while world demand is falling. The authorities still have substantial resources to intervene to  
help restart the economy. Central government finances are not threatened. However, after the shock to GDP growth, the expected  
upsurge in domestic debt ratios will once again aggravate vulnerabilities in the financial sector.  
China, which was the first country to be hit by the coronavirus  
1-Forecasts  
outbreak, reported a very sharp drop in activity after the population  
was put in lockdown, from the Chinese New Year celebrations at the  
end of January through the end of March or early April (rules and  
dates vary from region to region). The brutal shock was transmitted  
through numerous channels, ranging from a supply-side shock to a  
shock on domestic demand and exports, a revenue shock and a  
confidence shock. Activity has begun to rebound, and the authorities  
have launched stimulus measures that should help bolster the  
recovery. Major downside risks persist however. Lost corporate  
revenues, a deteriorated labour market and uncertainty over the  
pandemic’s future course will hamper domestic demand. At the  
same time, the export sector is bound to be hit by the repercussions  
of the sanitary and economic crisis that is spreading worldwide. We  
expect to see an unprecedented contraction in real GDP in Q1 2020  
2
018  
2019  
2020e  
2021e  
Real GDP growth (%)  
6.6  
6.1  
1.5  
9.5  
Inflation (CPI, year average, %)  
Actual fiscal balance / GDP (%)  
Current account balance / GDP (%)  
2.1  
-4.1  
0.4  
2.9  
-4.9  
1.2  
3.1  
-6.5  
1.0  
2.0  
-5.8  
0.6  
e: BNP Paribas Group Economic Research estimates and forecasts  
2- Collapse  
y/y % nominal change, year-to-date  
25  
15  
(
-8% year-on-year), followed by a rebound in economic growth  
starting in Q2. We have just revised down once again our real GDP  
growth projection for 2020.  
5
An unprecedented shock  
-5  
15  
25  
After the authorities imposed drastic measures to contain the  
epidemic, consumption of goods and services collapsed (Figure 2).  
Retail sales volumes declined by 23% year-on-year (y/y) in the first  
two months of 2020, with automobile sales entering a free fall (-78%  
y/y in February). Online retail sales were more resilient, but  
nonetheless contracted by 3% y/y in January-February due to the  
decline in sales of services and non-essential goods. Transport  
networks were paralysed (with passenger traffic down 84% y/y in  
-
-
Investment  
2014  
Goods exports  
2016 2017  
Retail sales  
2018 2019  
2
013  
2015  
2020  
Source: NBS  
The epidemic’s spread in China is currently contained and the  
economy is recovering. Restrictions have been lifted on domestic  
passenger traffic and merchandise transport (albeit still partially in  
Hubei) and export activity has started up again. At the end of March,  
the official work resumption rate was 98% for large industrial  
enterprises (and 85% in the province of Hubei) and more than 70%  
for small and medium-sized enterprises (SME). Yet production  
capacity utilisation rates are still far below pre-crisis levels (it was  
February). Construction and the real estate sector were also hard hit  
1
(
property sales were down 40% in the first two months of the year) .  
The supply-side shock was just as severe since factories were  
forced to remain shuttered after Chinese New Year and the work  
force was put in lockdown. Industrial output plunged 13.5% y/y in  
real terms in the first two months of 2020 (vs. +5.8% in 2019). The  
shutdown of production lines and transport blockages contributed to  
the decline in merchandise exports (-17% y/y in January-February  
and -6% in March). Lastly, falling revenues and uncertainty over  
future growth prospects led corporates to drastically scale back  
investment in all major economic sectors. Total fixed-asset  
investment declined by 25% y/y in the first two months of the year.  
77% in the industry in Q4 2019). Production facilities are expected  
to return to normal by the end of April for industry and by the end of  
Q2 for services (with the exception of tourism).  
However, just as the supply-side shock is winding down, a new  
demand shock is taking shape. The collapse in world demand will  
rapidly undermine China’s exports. Therefore, their protracted  
contraction will threaten the recovery in the manufacturing sector  
(
which also continues to be affected by higher US tariffs). This  
1
Services account for 54% of GDP, including retail trade (10%), transport  
should drive export-oriented corporates to reduce inventories and  
scale back investment. In addition, both households and corporates  
(4%) and real estate (7%). The industrial sector accounts for 39% of GDP,  
including construction (7%).  
EcoEmerging// 2nd quarter 2020  
4
economic-research.bnpparibas.com  
have been hit by a revenue shock, which will continue to squeeze  
domestic demand in the short term. Finally, there has been a severe  
erosion in confidence due to the pandemic and uncertainty over its  
future course.  
3
- Lower interest rates  
Weighted average lending rate  
Medium-term lending facility (MLF) rate (1Y)  
Loan Prime Rate (1Y)  
Repo rate (7D)  
6
%
%
%
%
The financial situation of many corporates has weakened and their  
capacity to invest and repay loans has deteriorated (profits of  
industrial enterprises declined by 38% y/y in the first two months of  
5
4
3
2020, and eight SMEs out of ten reported cash-flow problems in  
early March). Total domestic debt of the corporate sector is  
excessively high, at 150% of GDP at year-end 2019 (more than two  
thirds of which are bank loans). The debt burden reduces  
corporates resilience to shocks, and the increasing risk of default  
on bank loans and in the local bond markets could weaken the  
financial sector. In contrast, corporates’ external debt in foreign  
currency is small (estimated at 7% of GDP) and is not a source of  
instability for China’s external accounts, even if payment difficulties  
and refinancing risk increase.  
2%  
1
%
2016  
2017  
2018  
2019  
2020  
Source: Central Bank  
repayments of clients facing difficulties. Prudential standards have  
been (moderately) eased for commercial banks, as well as the rules  
for issuing corporate equity and bonds.  
Chinese consumers are expected to remain both constrained by  
their income loss and very cautious. Job market conditions  
deteriorated rapidly during the confinement period: the  
unemployment rate surged to 6.2% in February from 3.6% in  
December 2019. The shock will also be amplified by household  
indebtedness. Their debt-to-GDP ratio was 55% of GDP at the end  
of 2019, which is not excessively high yet. However, it has  
increased significantly over the past ten years. More importantly, the  
debt burden is much higher for low-income households, which are  
also more vulnerable to income shocks. Consequently, there is  
likely to be an even sharper downward adjustment in private  
consumption in the short term.  
On the fiscal front, the central government has opted for a relatively  
measured response until now. It has increased spending (notably on  
healthcare: +RMB 110 bn), exonerated companies from some social  
welfare contributions (RMB 500 bn) and taxes, reduced electricity  
rates for corporates by 5%, and announced fiscal incentives to  
stimulate domestic demand. Local governments also participate  
actively in stimulus efforts, notably by increasing investment in  
infrastructure projects (a traditional policy tool in China) and through  
direct aid for enterprises and households (such as reduced rent for  
land leases and the distribution of coupons). Beijing has  
substantially increased the local government bond issuance  
programme to finance infrastructure projects (RMB 850 bn in  
addition to the initial quota of RMB 1 trn for 2020).  
Actions on all fronts  
Since February, the government and the central bank have  
launched a series of measures that aim: 1) to support corporates  
that have been hard hit by the coronavirus outbreak, help prevent  
defaults and bankruptcies, limit the risk of financial-sector instability  
and facilitate the economic recovery, and 2) to offset the decline in  
revenues and to stimulate investment and consumption. As the  
external environment deteriorates, Beijing is expected to bolster its  
stimulus measures in the weeks ahead.  
Public finances can absorb the shock  
The authorities’ actions will play a key role in restoring economic  
growth. The central government has comfortable fiscal manoeuvring  
room and the central bank has ample liquidity cushions to ensure  
the stabilisation of the financial system. In contrast, the debt excess  
of the economy is constraining monetary policy as well as the  
investment capacity of local governments (their total debt already  
represents about 50% of GDP). Consequently, while it is highly  
likely that the central bank will continue to ease monetary conditions  
in the short term and that local governments will further increase  
investment, the central government will have to give priority to fiscal  
stimulus measures. Fiscal deficits will rise to historically high levels,  
but the central government’s financing needs will be easily covered  
and its debt will remain moderate: it represented 16% of GDP at  
year-end 2019; it is almost entirely in local currency, and more than  
Monetary conditions have been eased gradually since the beginning  
of the epidemic. The central bank has injected liquidity in the  
financial sector in order to meet demand (RMB 3 trn in the first two  
weeks of February). It initially opted for a moderate reduction in  
policy rates (the rate on medium-term lending facilities was lowered  
from 3.25% to 3.15% in February and then left unchanged in March),  
but recently stepped up the easing in interest rates (Figure 3).  
Special credit programmes have been introduced, such as an  
expansion of relending facilities (RMB 700 bn) and a special loan  
program by policy banks to help small firms (RMB 350 bn).  
9
0% of which is held by local investors.  
In mid-March, reserve requirement ratios were lowered by between  
5
0 bp and 200 bp (depending on the bank) in order to free up  
RMB 550 bn for targeted loans. Banks have also been sent  
directives instructing them to cover the financing needs of  
corporates hit by the epidemic, refinance loans and reschedule loan  
QUI SOMMES-NOUS ? Trois équipes d'économistes (économies OCDE, économies émergentes et risque pays, économie bancaire) forment la Direction des Etudes Economiques de BNP Paribas.
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