Might a V-shaped recovery be in store for China?
We asked fixed-income portfolio manager Chris Wu, who is from China and still has family there, for his insights into the impact the coronavirus is having there and on markets and the economy generally.
Q: What are you hearing from your family?
Many Chinese cities, including where my parents live (more than 600 miles away from the epicenter, Wuhan), are not under a strict, government-ordered lockdown. There have been, however, restrictions imposed on practically every aspect of life. People only venture out with a facemask on, and only out of necessity—maybe to get food and groceries. Many stores are closed anyway, along with theaters, museums, cinemas, temples, barbers, hair salons, karaoke bars, and most other shops and restaurants.
Q: What about the Chinese government’s response?
Since confirmation of the first human-to-human transmission on Jan. 20, the Chinese government’s response to this new outbreak has been swift and decisive. It represents a marked departure from public health policies that, during the SARS outbreak in 2002, contributed to the deaths of 774 people and spread of the disease to 37 countries over a period of six months. This time, authorities are requiring people everywhere to wear masks and stay inside, and domestic travels have been discouraged. The government has closed most factories and delayed reopening of schools and offices—essentially extending by weeks the country-wide shutdown that occurs every year during the weeklong Lunar New Year holidays. This year, the celebration just happened to coincide with news of the outbreak.
While there are a lot of uncertainties about the extent and duration of the epidemic, the government’s vigorous response could mean faster containment but, at the same time, much sharper economic damage in the near term. This is especially true for mainland China, but much of the sell-off in the risk markets last week related to concerns about the potential adverse impact on global supply chains and U.S. companies that do business in the second-largest economy in the world.
Q: What do you expect the ultimate economic impact will be?
Assuming the coronavirus can be contained relatively quickly, I wouldn’t be surprised if we ultimately get a V-shaped recovery, led by the industrial sector. Some activity can never be recovered, of course, but a lot can, and I would anticipate that’s what will occur as spending catches up.
It helps that the Chinese government is planning substantial stimulus. To calm financial markets, the People’s Bank of China already has injected hundreds of billions of dollars through reverse repos and is expected to soon cut reserve requirements for banks and its key lending rate. Reports suggest Beijing also is readying a ramp-up in government spending, with support measures concentrating on the retail, catering, logistics, transportation and tourism sectors that have been hit hard and are vulnerable to job losses.
Economic and political researcher TS Lombard has laid out three scenarios—the best case being a reopening of Chinese factories in two weeks and the worst not until early April—with first-quarter GDP growth in China ranging from 5% to 2%, depending on the scenario. That would compare to estimated 6% or so growth in 2019’s final quarter. For the year, TS Lombard projects China GDP will still expand as much as 5.8% or as low as 5%, versus 6.1% for all of 2019.
Personally, I think the underlying drivers of growth remain intact, with the global cycle supported by monetary and fiscal easing and the relaxation of trade tensions. While February and March are likely to result in temporary weakness in China and to some extent the rest of the world, the global recovery we were projecting before the coronavirus hit should get back on track in the second quarter.
Federated Hermes analyst Jingjing Pan contributed to this article.