China’s Economic Outlook: Country faces double whammy of COVID-19 and trade war with the US

Coronavirus induced economic fallout is set to drag 2020 GDP growth for China as it suffers twin struggle of the drop in overseas demand and earlier hit to its domestic GDP numbers. The country resorted to massive stimulus measures during the 2008 financial crisis, which pushed it to a structural slowdown and led to high levels of debt.

Coronavirus that originated in the Chinese city of Wuhan affected 82,995 people in the country, taking away 4,634 lives and it has now spread to ~215 countries globally. Though the country successfully overcame the virus, there is still a risk of the possible second wave of infection.

China has taken active measures to contain the pandemic by putting the whole country in lockdown in February and then relaxing measures while restarting production and businesses. However, many export-oriented sectors have witnessed a drop in demand and cancellation of orders due to coronavirus affected industries globally.

GDP of China dropped 6.8% year on year during Q1 2020 as coronavirus compelled factories and businesses to shut down.

China’s Premier, Li Keqiang’s speech on May 22 at Annual national People’s Congress reflected that China would not set any target for economic growth for 2020. It has not done that since it started releasing such goals in 1990. Such a move will make recovery for the country even more difficult.

China is targeting a budget deficit of not less than 3.6% of GDP for 2020 and has set up the quota on government special bond issuance at 3.75 trillion yuan. The country has also planned to issue 1 trillion yuan for the first time in special treasury bonds.

Chinese economy healing slowly

The economic indicators of China point to a U-shaped recovery assuming coronavirus remains contained.

According to S&P Global, large industrial firms resumed to 95% of normal capacity just 3 months after reaching a peak in COVID-19 cases during early February. While the manufacturing output increased by 5% in April compared to a year ago, the technology sector has bounced back, and consumer goods are below 2019 levels.

However, the revival of the industry is far from enough to save the economy. The services sector makes for 55% of the economy, 50% of employment but is lacking recovery at present as social distancing limits activity. Further, the majority of the services sector companies reported lower employment in March and April while answering to the Purchasing Manager’s Index (PMI) survey. Uncertainty in the jobs market could result in households resorting to saving behaviour, while retail sales remain weak.

The new surveyed unemployment rate is around 6%, already at the target for 2020. It is an enhancement over earlier measures but undercounts the number of people on a lookout for work. The reason for this is that the migrant workers who return home to work on their farms when they lose their jobs should be counted as unemployed or underemployed. However, the same is not included by surveyors in their reports.

US-China trade war

US-China trade war that started in July 2018 has got even worse. US President, Donald Trump has been particularly wary of the US being taken advantage of by especially China, which gained from the US by running two-sided trade surpluses. He took protectionist policies against imports from China without realising that such policies will only result in the substitution of imports from other sources.

The recent reduction in overall US trade deficit has reflected changes in global trade majorly affected by the COVID-19 outbreak.

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The US imposed 25% tariff on Chinese imports on July 6, 2018, after which the trade war began. At this time, the global economy was worried about trade pressures that altered investment decisions and obstructed supply chains. Hence, an agreement on Phase-1 trade deal was reached in mid-December 2019, where China assured to buy USD 200 billion more of US goods and services over 2 years, and eliminated barriers to US exports. In contrast, the US agreed to suspend an additional 15% tariff to be levied on imports from China worth ~USD 160 billion.

However, the coronavirus outbreak between (December 2019- January 2020) affected the trade for some time. But China committed to honouring the deal has persisted on making positive offers to the US on the trade front.

According to S&P Global Ratings agency, the trade conflict can result in softer manufacturing investment as firms may respond to elevated ambiguity by delaying investment that they may possibly bring back online after coronavirus threat eases down. Moreover, there is a possibility of consumer confidence being impacted with regards to economic situation. China would respond to it by extending policy support for domestic demand implying larger stimulus.

As per the Rating Agency, China is expected to slow to 5% or below in 2022.

With rising uncertainty and a near halt of global trade, the US-China trade deal calls for a renegotiation.

The coronavirus pandemic has brought itself with unknown economic risks that are not similar to the global financial crisis. However, with no set growth target, it is widely accepted amongst policy experts that the economic growth will be lower in 2020. More upbeat fiscal policy and an adaptable monetary policy with higher growth in the broad gauge of money supply and total social financing are expected in 2020. This year, China’s growth would rely on a rebound in both the third and fourth quarter period.