China fails to ease global ‘depression’ fears

Economic numbers illustrate challenges ahead as the world’s second-largest economy shrinks by nearly 7% in first quarter; worst contraction since Cultural Revolution

by Gordon Watts
China fails to ease global ‘depression’ fears
A lone woman pushes a baby stroller outside an Apple store in Beijing earlier this month. Photo: AFP / Nicolas Asfouri

In a world suffering from anemia, China might need another fiscal blood transfusion to inject new life into its economy.

Data released by the National Bureau of Statistics has revealed that GDP growth in the first quarter dropped dramatically. Of course, that was expected.

But a fall of nearly 7% illustrated the task of getting the country back on track after it was ravaged by the Covid-19 pandemic earlier this year.

Again, the United States and most of the leading nations in Europe are witnessing a meltdown in business activity. Populations are in lockdown, while economies have been brought to a standstill in the fight against a silent but deadly enemy.

The long road to recovery will be arduous.

“Public records suggest that at least half a million firms [in China] were dissolved in the first quarter and more are likely to close shop,” Mark Williams, the chief Asia economist at Capital Economics, said in a report this week.

'Worst since Cultural Revolution'

As for the numbers, take a depth breath. In the first quarter, GDP contracted by 6.8% compared to the opening three months in 2019. It was the first reported period of negative growth since data was first released in the 1990s.

Historians have gone even further back, claiming that the economy last contracted at such a rate during “the Cultural Revolution.”

“We are now facing rising pressure in preventing imported epidemic infections, as well as new difficulties and challenges for resuming work and production,” Mao Shengyong, a spokesman for the National Bureau of Statistics, told a media briefing after the stats were released.

Moving on, retail sales in March plunged 15.8% compared to the same period last year after a 20.5% decline in the first two months of 2020. Urban employment was also down 5.9% but above the 6.2% fall in February.

Mixed reaction

Elsewhere, the NBS announced that industrial production last month edged lower at 1.1% after plummeting 13.5% in the first two months of 2019. Finally, fixed-asset investment, which reflects capital spending, slumped 16.1% in the first quarter year-on-year compared with a 24.5% fall between January and February.

Reaction to the data was mixed.

Iris Pang, the chief economist for Greater China at multinational bank ING, described the GDP contraction as “terrible.”

“The last time we saw such a big contraction was back in 1967 when China experienced growth of -5.8% during the Cultural Revolution. The contraction this time is a result of city lockdowns and strict social distancing measures. The comparison of the scale provides us with a sense of how big an impact Covid-19 has had,” she said.

“Signs of a recovery in activity are mixed. We expect that as long as strict social distancing measures are in place, China will have difficulty achieving a fast recovery,” Pang added.

Zhu Chaoping, the global market strategist at JPMorgan Asset Management, was more upbeat. “Despite the dim GDP numbers, economic activities have been on track for normalization since early March. Improvements are seen in the monthly indicators including industrial production, retail sales and fixed asset investment,” Zhu said.

Economists Tommy Wu and Louis Kuijs at Oxford Economics echoed those views in a report.

“[This suggests] that a recovery is underway [in China]. However, lingering consumption weakness and sliding foreign demand will weigh on the upturn. While we forecast strong growth in 2021, we continue to expect little GDP growth for this year as a whole,” they said.

Concerns also persist that Chinese economic data is massaged for political reasons.

“The actual contraction in the first quarter, especially in March, could be worse than headline numbers suggest,” Nomura analysts said in a note.

Read: Don’t expect China’s consumers to bail out the world

Read: Great Depression stalks virus-ravaged economies

Read: Inside Wuhan’s secretive National Biosafety Lab

Yet figures released by China’s General Administration of Customs on April 14 did manage to buck economic surveys. Exports in dollar terms fell by 6.6% in March compared to the same period last year and more than 11% for the first quarter. As for imports, they slipped by just 0.9%.

Still, the country is struggling to ramp up “business activity” to full capacity after the manufacturing shutdown at the start of the year. 

According to an index compiled by Trivium China, the economy is “operating at 82.8%” of normal output. “The enterprise index indicates that China’s large enterprises are operating at 83% while China’s small businesses are operating at 82.6%,” the policy research group stated on April 16.

But then the challenges are immense, considering the sheer scale of the Cover-19 pandemic across the globe. So far, more than 2.1 million people have been infected by this new strain of coronavirus with the death toll edging closer to 150,000.

Already the World Trade Organization has warned that 2020 could see the biggest collapse in international trade since the Great Depression or the “worst recession of our lifetimes.”

Last week, the International Monetary Fund issued a similar statement, pointing out that the planet now faces the deepest downturn since the 1930s. Another reference to the Great Depression.

The omens have certainly taken a sinister turn with business activity flatlining as the disease spreads. In response, global governments have injected $8 trillion into the system to prop up creaking economies, the IMF confirmed last week.

Beijing’s stimulus package looks anorexic in comparison to measures rolled by the US, the European Union and Japan.

“China’s response is more limited than during the [Global Financial Crisis with] fiscal support as of April 10 amounting to roughly 1.3% of GDP, primarily through loans for impacted businesses and tax relief,” Stephanie Segal and Dylan Gerstel, of the Center for Strategic and International Studies, said earlier this week.

“Chinese officials have signalled they could provide additional stimulus later this year as the health situation stabilises, but a desire to avoid adding to already high total debt levels will likely limit potential spending,” they wrote in a commentary.

In the end, this will end up being a numbers game. Even for China.

This story appeared first on the Asia Times website