HONG KONG, 22 April 2020. Pengyuan International has today published an update of its views on the impact of the COVID-19 pandemic on China’s economy. As the COVID-19 crisis continues to wreak havoc across global economies, we now believe that the pandemic’s impact on China may be more profound and prolonged than our expectations back in February (see March Marks a Critical Point for China’s Economy). Our increased caution stems from the sharp contraction in the economic activity of China’s key trading partners, slower than expected resumption of work and production domestically, as well as the more restrained policy responses and support by China’s government so far. In view of the risks these emerging trends pose, we have revised down our 2020 real GDP forecast for China from 3.1% in our prior severe scenario to a base-case estimate of 1.5–2.0%. We have also revised a number of other macro forecasts which, on aggregate, paint a more challenging picture for China’s public finances, corporates, and households for the remainder of the year.
Here are the key takeaways from this report:
We have cut our 2020 base-case real GDP growth forecast to 1.5-2.0% in anticipation of a more protracted path to recovery. We have also revised down our growth forecasts on retail consumption and fixed-asset investments to 3-4% and 0-2%, respectively. While we had originally expected economic activity to rebound noticeably in 2Q20, we may now see a flatter trajectory lasting until 3Q20 to 4Q20. In particular, we note that the resumption of production remains uneven across regions and sectors, with many sectors continuing to struggle with re-staffing, re-stocking and logistics arrangements. The retail, hospitality, entertainment, travel, and transportation sectors may also remain stalled before containment measures are gradually relaxed.
We expect to see a significant decline in exports in the order of 5-7% for 2020, compared to a modest expansion of around 1% in our prior severe scenario. The COVID-19 pandemic has rapidly evolved into a global economic crisis, affecting China’s major export partners, most notably the United States, Europe, Hong Kong, Japan and South Korea. Although China’s export contraction moderated to 6.6% year-on-year (y/y) in March – compared to a 17.2% y/y plunge in January and February combined – we believe the outlook on export demand will continue to be bleak up to the summer of 2020 as nations fight to contain the virus.
We expect consumer price index (CPI) growth to be 3.5% for the full year, more than one percentage point lower than our previous severe scenario. China’s CPI growth was 4.3% y/y in March, compared to 5.2% in February. We believe the tail risk of China’s inflation has now eased as the critical Spring planting season appears to be less affected by COVID-19 than we had originally feared, according to recent government releases. We believe the next crucial juncture will be the August/September planting cycle. Moreover, the global energy price collapse in March will also help contain inflation risk domestically in China. In the absence of further disruption to production and staple food supplies, and with prolonged low energy prices, we anticipate inflation will continue to be moderate for the remainder of the year.
A potential second wave of the COVID-19 outbreak may present further downside risks to our forecasts. At the time of writing, there are early indications that the outbreak may have peaked in a number of countries, although the full social, economic, political and health impacts may not fully materialise until well into 2021. As far as China is concerned, we now see 3Q20 as a potential inflection point for key macroeconomic indicators, with a gradual recovery path beginning in 4Q20. In the interim, we believe the Chinese government will continue to adopt an accommodative monetary policy. In our view, regulators may also push through further stimulus packages for micro and small enterprises, whose survival may to a large extent determine the depth and breadth of the economy’s rebound.
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Stanley Tsai, CFA
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Ke Chen, PhD
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Date of Relevant Rating Committee: 21 April 2020
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