Covid-19 virus disruptions exacerbate China’s slowdown

T Covid-19 epidemic is a public health emergency and a severe economic shock. The death toll in China amounts to over 2,700, with the number of confirmed cases at more than 78K, Scope Ratings agency says in a released commentary.

“We have lowered the growth estimate for China for 2020 to about 5.0%, from the previous forecast of 5.8%, due to economic dislocations associated with the Covid-19 virus,” says Dennis Shen, lead analyst at Scope for China. “This would mark a further slowdown after 6.1% growth in 2019. The US-China trade dispute and now virus-related dislocations have accentuated longer-standing structural reasons for a slowing economy. Our 2020 growth estimate assumes a deep, even if short-lived, curtailment to growth in Q1, before the beginnings of recovery by Q2. However, the shape of the economic recovery is likely to be gradual – as factories, retail businesses, foreign companies in China, schools and transport tentatively return over time towards normality – a process that China has sought nonetheless to accelerate this month. The global spread of the virus, disrupting the economies of major trading partners such as South Korea’s and Japan’s, means moreover that China’s growth in 2020 will be held back by weaker-than-expected exports of goods and services.”

“In the 2020 growth forecast, we assume for now the Covid-19 outbreak is relatively contained within China’s borders by the end of next month,” says Giacomo Barisone, managing director at Scope for sovereign ratings. “However, there is naturally significant uncertainty in this area, and risks remain that as quarantines are eased and people return to work that new cases could arise or it may emerge that existing cases have been under-reported. Any lengthier spell of epidemic-induced supply-chain disruption and restrictions to the freedom of movement in China could have not only more serious consequences for economic growth but more worrying implications for financial stability.”

Interruptions to China’s growth come at a sensitive time during which public- and private-sector balance sheets have weakened after earlier shocks to China’s economy in past years. Under a 2019 central bank stress test that assumed annual economic growth in China slowing to 4.15%, non-performing loans on the 30 major Chinese banks’ balance sheets rose five-fold, with seven of the 30 banks failing the examination under global standards.

“The Chinese government is acting to get the economy back to normal as speedily as possible, well aware of the deep vulnerabilities within the financial system in the scenario of an extended lockdown with the associated loss of revenues and cash flow for businesses, even as authorities report additional Covid-19 cases,” says Shen. “Given the significance of the year 2020 as the end-date Beijing set in 2012 for doubling GDP and household incomes from what they were in 2010, we can expect additional monetary and fiscal stimulus in coming months in addition to what the government has already announced to elevate growth.”

As such, Scope will review the 5% growth estimate for any upside in addition to for downside risk. The 5% growth for 2020 could be too low for the government to meet its 10-year GDP objective by 2020 – a failure Beijing will do its utmost to avoid. Conversely, should infections not be contained in the coming weeks, downside risk to growth this year becomes more severe.

“As China contributed over a third of 2019’s global growth rate of 2.9%, the curtailment in 2020 growth expectations for China’s economy alone entails weaker global growth of at least 0.1-0.2pp. However, when the global spread of the Wuhan virus alongside the critical import of China’s economy in today’s global economy and supply chains are taken into account, the impact of Covid-19 on global growth this year could be even greater,” says Barisone. “We had previously expected already weak 2020 global growth of about 3%, but there is clear downside risk to this estimate.”

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