March 19, 2020, Thursday, 11:04 p.m.
Author: Flagman.BGBeijing adopts a more conservative approach to dealing with the current crisis than in 2009.
When capitalism seemed to be flowing into the Western world in 2009, China’s demand for everything from iron ore to designer handbags helped restore the world economy from the darkest days of the financial crisis.
Fueled by a $ 586 billion package of measures, the Chinese economy grew 9.4% that year and crossed the 10 percent threshold in 2010, earning praise for its leadership in rebuilding the global economy at a time when the US and Europe were experiencing difficulties. The effort consisted mainly in bank lending and stimulating economic activity, while Chinese companies supplied the world with raw materials and commodities.
Some economists believe China will launch an incentive program that will spark a new wave of demand in countries devastated by the coronavirus and help save them from the global recession.
This time, however, the People’s Bank of China has taken a more moderate approach, even as the US Federal Reserve injects trillions of dollars into the financial system and central banks around the world lower their interest rates.
The Chinese National Bank lowered lending rates slightly and opened new 550 billion yuan ($ 78 billion) lending capacity with banks this week.
“There is great enthusiasm for the Chinese National Bank’s interventions here in Europe, especially given the fact that the ECB’s margin of maneuver is so limited,” said Ipek Ozkardeskaya, senior analyst at Swissquote Bank.
But the world’s second largest economy is in the midst of its sharpest contraction since the 1970s. Factories and shopping malls were empty in February as hundreds of millions of people stopped moving in a state of emergency.
Industrial production contracted by 13.5% in January and February, the fastest pace in history, data from the National Statistics Office showed on Monday. Retail sales fell by 20.5% in the first two months of this year compared to 2019, and urban unemployment reached 6.2% in February, the highest level in history.
According to Capital Economics calculations, gross domestic product will shrink by about 20% in the first three months of this year compared to the previous quarter.
The pace of capital investment in the country, which is generating global demand for construction materials and machinery, was slowing down before the coronavirus crisis, said Mo Ji, chief economist for China at AllianceBernstein, an investment management company.
This means that even a strong stimulus program in China will not support global growth. “No matter how much credit corporations take, there is no room for a new expansion of capital spending,” she notes.
Neil Scheering, chief economist at Capital Economics, expects China to leverage incentives to achieve a recovery from arguably the worst quarter for the country from the Cultural Revolution in the 1960s and 1970s. Capital Economics estimates that the country’s GDP contracted by 13 percent in the first two months of this year.
Sharing expects the incentives to be around 2% of GDP and come from a variety of sources – targeted fiscal support in the form of loans and subsidies for the hardest-hit employers and easing monetary policy. In addition, the central bank may offer cheap financing to banks providing loans to the most affected sectors.
This could increase the deficit this year and add to China’s already huge debt. But Scheering says Beijing probably has the financial instruments to avoid falling into debt.
“Significant incentives will be a problem for China’s debt structure in the medium term, but will not be the cause of the fiscal crisis in the short term,” he said.
China’s total debt burden is about 310% of GDP, one of the highest levels in emerging economies, according to International Financial Institute.
“Macroeconomic stimulus efforts will be much more modest than in 2009, as large-scale incentives do not fit the current thinking of Beijing executives,” says Louis Kudzis, Head of Asian Economics at Oxford Economics.
Chinese People’s Deputy Governor Chen Yulou told the Financial Times some time ago that the central bank plans to maintain a “normal monetary policy”, signaling that it would avoid introducing negative interest rates.
“My feeling is that even now, leaders attach more importance to financial stability than in 2008 and 2009,” says Nikolai Schmidt, chief international economist at the investment management firm’s fixed income division T Rowe Price.
After all, China will play a role in global recovery, said Helen Qiao, an economist for China at Bank of America. As the normal economic environment returns, executives are expected to trigger fiscal and monetary stimulus, which will increase demand for raw materials and goods abroad in the second half.
“There is a good chance that China will be the first to decline and the first to recover,” she added.