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Workers wear protective face masks at a factory of home appliances company Galanz in Foshan, China, on February 18. China’s purchasing managers’ index bounced back strongly in March, up from an all-time low in February. Photo: EPA-EFE
Opinion
The View
by Hao Zhou
The View
by Hao Zhou

China’s coronavirus-driven supply shock has eased, but it is bracing for a drop in demand

  • The domestic job market has softened and external demand from the US and UK is expected to slow down. More fiscal stimulus should be in the offing
  • Car sales may rebound as local governments launch policies to support the auto sector, but easing of curbs on the property sector looks unlikely
Hao Zhou
Hao Zhou
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China has been moving quickly to reboot its economy, which is now more or less back on track. For example, coal consumption has almost returned to normal levels and the volume of traffic in large cities also climbed close to pre-epidemic levels in March.
Food prices have fallen to the pre-epidemic range, suggesting that both supply and logistics have bounced back. Rising food prices had pushed the consumer price index to above 5 per cent in January and February, somewhat constraining room for policy easing. Nevertheless, the recent recovery in supply has largely contained the price rise, giving policymakers room to manoeuvre.

By and large, supply shock is no longer the biggest threat to the economy, as many had feared when the entire country was in a lockdown mode in February.

However, a demand shock has been looming on the horizon. There are two obvious risks that would weigh on demand in the foreseeable future.

First, on the domestic front, the job market has softened, with the urban surveyed unemployment rate above 6 per cent for February, compared with around 5 per cent in normal times. The recovery in domestic demand is likely to lag behind the supply rebound.

Second, external demand is facing even stronger headwinds as both the US and Europe are gradually entering “mute” mode, which has already dampened the global growth outlook.

It is reasonable to expect that a certain degree of fiscal stimulus is set to be released to boost demand, particularly on the domestic front.

A shopper walks past a store on Wangfujing Street in Beijing on November 3, 2018. As demand from Europe and the US dries up, the government must boost domestic consumption. Photo: Bloomberg

Sheng Laiyun, deputy head of China’s National Bureau of Statistics, estimated that the economic lockdown had affected consumption worth 1.5 trillion yuan (US$211 billion). While it will hard to recoup losses of consumption in some areas, such as catering and tourism, Sheng suggested the government focus on pent-up demand in other areas, such as automobiles.

Local governments seem to be working on special policies to boost auto sales. The most recent is Hangzhou’s announcement that it will raise the quota of car number plates by 20,000 for this year, a 25 per cent increase over the previous quota. In mid-March, the Ministry of Commerce also said it supports local governments on subsidies for car purchases.

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China’s car sales, which had dropped for the second consecutive year in 2019, started 2020 with a deep dive due to the coronavirus outbreak. While preliminary data suggests that car sales could fall by more than 50 per cent year on year in the first quarter of 2020, this also suggests that a decent amount of pent-up demand would be released with strong policy support.
Employees work at the assembly plant of FAW-Volkswagen Automobile in Chengdu in southwest China’s Sichuan province on February 19. The company resumed production at its four production bases across China on February 17. Photo: Xinhua
However, the easing of restrictions in the property sector appears to be off the table for now, largely due to concerns about household leverage. Over the past month, a few Chinese cities have attempted to relax property curbs, but all of these proposals have been rejected by the central government. Stimulus to boost the property sector, as was used in the past, seems a distant possibility for now.

In the meantime, monetary policy will remain supportive over the coming quarters. Apart from the reduction of inflationary pressure, which offers room for further monetary easing, there have been reports that China’s central bank will cut benchmark deposit rates in the coming days to reduce the cost of funds for commercial banks and encourage them to provide cheaper consumer credit.

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A detailed policy response to boost demand will only be available after the much anticipated National People’s Congress meeting. This important political event, at which China releases its official economic targets, was postponed due to the epidemic.
However, as China has removed most travel restrictions and plans to lift the travel curbs on Wuhan, the epicentre of the outbreak, on April 8, the country will soon resume its regular policy setting agenda. The National People's Congress will reportedly convene as early as end-April.

Some reports cited sources saying China would set its 2020 growth target at 5 per cent, compared to 6-6.5 per cent in 2019, and raise the budget deficit to 3.5 per cent of gross domestic product, compared to 2.8 per cent in 2019.

Nonetheless, Chinese Premier Li Keqiang recently said China should focus on maintaining employment amid the pandemic, with its economic growth rate for 2020 “not a big deal”.

While these messages sound somewhat self-defeating, it looks like Beijing is in the final stages of compiling the economic numbers to come up with a comprehensive action plan for the government work report to be delivered at the National People’s Congress. But as the virus has been largely contained and the domestic supply chain is back to work, Beijing needs to make sure demand is sufficient to avoid another economic slump.

Hao Zhou is senior emerging markets economist at Commerzbank

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