The Year of the Rat was looking promising for the Chinese economy at the Lunar New Year vacations Eve. When European and American economies were running out of steam, a first step in the conclusion of a trade agreement with the United States had been cleared and the risks of a tensions worsening were passing. 2019 growth had over passed 6% and that was a result that would have made the whole world envious. December figures were even showing an accelerating trend. The sanitary catastrophe which occurred in January, when according to the tradition hundreds of millions of Chinese are going into vacations or are going to meet their families, has sank the country into the deepest recession since the launch of economic reforms in 1979. Travels have been cancelled and one of the major industrial regions in the country, around its capital, Wuhan, where the outbreak started, has practically stopped all its activities. The consequence progressively spread to the whole country. 1st quarter GDP fall compared to 2019 4th one has been near 8% and 6.8% compared to 2019 average, according to the figures which has just been published.
Lockdown measures have permitted to slow the development of the outbreak and its progressive lifting occurred in March, but with a different rythm in the regions. In Wuhan, where the toughest restrictions have been instituted, they have been removed on April 8th and the economic activity is restarting. In the whole country, retail sales have fallen by 19% and investments by 16% during the 1st quarter. But the split of the figures by month gives important indications about the evolution of the economy during that period. So, retail sales rebounded in March +16%) compared to the two previous months. The observation is the same regarding industrial production. The fall, compared to December was, as an average 13.5% during January and February. It was only 8.5% in March. Investment diminution has been, as an average, around 24% in January and February and only 16% in March.
So the first signs of a rebound are appearing and their analysis can provide valuable indications to other countries, facing the same situation with a time lag of several weeks. The Chinese government has launched a program to make the economy rebounding whose extent, compared to the GDP, is inferior to what we observe in Europe and in the U.S. Budget deficit shouldn’t over pass 5% of GDP and financings will be offered to enterprises for an amount of around 900 billion dollars. Atop of that, vouchers will be offered to household. It is judged more efficient than subsidies, which wouldn’t be necessary spent.
These measures are beginning to produce effects, if, for instance, we listen the declarations of L’Oreal and LVMH CEOs, whose companies consider China as an essential market. They observed, since the middle of March, a significant comeback of their clients. The first forecasts are starting to be published for the rest of the year. The 2nd quarter would know a new GDP fall, but much smaller than the previous one ((between -1 and -3%) et the following ones a strong rebound. Some are even thinking that a near 5% growth for the whole year could be reached with a GDP increase superior than 8% during the last two quarters. It is unlikely but the evolution of these previous weeks allows to thinking that a return to growth is likely, due to the impact of the government rebound program and to a catching up phenomenon from consumers. Chinese enterprises have the ability to satisfy their clients demands because it has not been observed significant closures of production sites.
The main uncertainty is about foreign trade. The current deep recession occurring in China clients will inevitably weight on its exports; but the internal demand would, at least partly, compensate their foreseeable diminution. Oil prices fall will contribute to support consumption because China is one of the biggest importers in the world. This trend is consistent with the country long term strategy whose leaders never stopped to repeat they wished a growth less dependent from their foreign environment and a rebalancing in favor of internal demand.
On a longer term, the corona virus crisis is going to provoke the questioning, in some sectors, of supply chains. The quest for an improved safety will become a growing worry and that will lead to re-localizations with, notably, the repatriation of production currently made in China. It would be wrong to think that it will only be limited to protective masks or components used to produce pharmaceutical products. But whatever the purpose is, that change was inescapable and the Chinese leaders are aware of it. The country vocation is not anymore to be the “factory of the world”. Wages evolution makes it less attractive and the employees qualification evolution has, as a consequence, that these ones will more and more desire in the future to have more enhancing jobs. This trend is irreversible. It is likely that the current crisis will make it faster but it doesn’t constitute a break putting in danger the Chinese economy.
The signals of a natural rebound of the activity and these structural considerations explain why Chinese financial markets have been much less affected by this crisis, which has started in the country, than the American and European ones. Shanghai and Shenzhen index have fallen by less than 10 % since the beginning of the year when the Dow Jones has lost 15% and the European markets, despite these previous weeks rebound, between 20 and 25%. But if China brings the prove that it has been able to overcome this crisis, to put an end to the outbreak, even if risks of new infections are still there as it has just been verified in the North of the country, and restarts, the other countries will hail that because it will have been proved that it is possible and that there is no reason they are not able to do the same. It is why it is essential to observe with precision the condition of the growth coming back in China because it can prefigure what will occur later in Europe and in the U.S.
It is quite legitimate to ask the Chinese leaders to make the full light on the origin of this outbreak because nobody contests the point that it has started in their country. But that legitimate request must not lead to make China responsible for all our troubles. In particular, it is not China fault if France did not have masks stocks dedicated to protect auxiliary nursing staff or tests able to detect the contaminated persons or even medical equipments to take care of the highly affected persons.
The most important lesson to take from this major catastrophe is that no country is in the position to pretend it is able to face alone to such events. To build the new future, the “tomorrow world” one, it will be much more efficient to work to the improvement of international cooperation than to look for scapegoats.