Eye on China is a weekly bulletin offering news and analysis related to the Middle Kingdom from an Indian interests perspective.
I. Mourning & Recovery
The mainland reported 31 new COVID-19 cases and four more deaths as of Thursday, the National Health Commission said on Friday. China now has 81,620 infections and 3,322 deaths from the coronavirus. Earlier in the week, Chinese health authorities said that they would also begin reporting asymptomatic cases. The State Council has said that on Saturday, the country will mourn “for martyrs who died in the fight” against COVID-19. “At 10:00 a.m. Saturday, Chinese people nationwide will observe three minutes of silence to mourn for the deceased, while air raid sirens and horns of automobiles, trains and ships will wail in grief.” Note, the late Dr. Li Wenliang is now officially designated as a martyr.
Reuters reports that in Wuhan, however, Party Secretary Wang Zhonglin wants residents to avoid leaving their homes unless necessary, fearing a second wave of outbreak. Stops and starts are expected. For instance, in Jia county in central Henan province this week, the lockdown was lifted and then new restrictions came into place on villages and residential compounds, with people not being allowed to enter or leave their homes without the relevant authorization. Expect similar local level hiccups and differentiated policies going forward. For instance, schools in Zhejiang and Shandong are expected to open by mid-April. These will offer a new test for the administration to return to normalcy.
Earlier in the week, Xi Jinping stepped out of Beijing, heading to Zhejiang province from Sunday to Wednesday. The images of the visit show him traveling without a mask in some places. Xinhua reports that we visited the Ningbo-Zhoushan Port and went to an industrial park in Ningbo, which produces high-end auto parts and molds. Following that he traveled to Yucun Village in the county of Anji, where the focus was growth and green development. The message that was being sent by this visit is rather clear. There are three broad priorities going forward, i.e., epidemic control, restarting the economy and pursuing previously stated developmental goals.
During his visit, Xi said the epidemic situation in China was “moving steadily in a positive direction, and the peak of the current COVID-19 outbreak is over in the country.” He added that “the risk posed by imported cases, however, has sharply risen as the pandemic is accelerating its spread across the world…stressing intensified management of asymptomatic virus cases in China. China will make preventing imported cases the top priority in its COVID-19 response at present and even for a ‘prolonged’ period of time.” Moreover, there was a positive take from Xi on the economic front. “Though the increasingly fast spread of COVID-19 abroad has disrupted international economic and trade activities and brought new challenges to China’s economic development, it has also provided fresh opportunities for expediting the country’s development in science and technology and advancing industrial upgrading.”
In terms of the economy, there was some good news. China on Tuesday said the official PMI for March was 52.0, beating expectations. In February, this had slumped to 35.7. The rebound is really not surprising and not a sign of the economy stabilising, as the NBS itself cautioned. PMI was bound to go up from February as restrictions eased. Trivium China’s Business Activity Index, updated on April 2, also shows an uptick in activity. Meanwhile, the Caixin China General Services Business Activity Index, which gives an independent snapshot of operating conditions in the services sector, rose to 43 in March from a record low of 26.5 in the previous month. Despite that, this is going to be a very difficult year. Nikkei and Nikkei Quick News’ expert survey forecasts China’s growth at 3.35. The ADB’s is 2.3%. The EIU’s is 1%.
The Chinese government has not officially released its GDP growth target for 2020. And there’s a debate in the country whether this should be done and if so, what should be the target. For instance, Yu Yongding, a former central bank adviser, told Caixin that a target is a crucial tool for companies, especially large enterprises, to use as a reference when setting their business plans. He wants a “realistic” target of around 4%. Others like Ma Jun, an academic working with the PBOC, want to ditch the target. They argue that pursuing an artificially high rate of growth would “kidnap macroeconomic policies and eventually force the use of an all-out stimulus.
One of the biggest economic issues emerging from the outbreak is that it’s going to complicate the management of debt and financial risks, given that there is likely to be some sort of stimulus. But so far, there hasn’t been a big bang. This week, the State Council meeting underscored the need to scale up special local government bonds to expand investment. Xinhua reports that as of Tuesday, the value of local government special bonds issued this year totaled 1.08 trillion yuan ($151.9 billion), surging 63% year on year. The Ministry of Finance has previously allocated 1.29 trillion yuan worth of new local government special bond quotas ahead of schedule this year to shore up the virus-hit economy. This figure is now being upped after the State Council meeting.
There’s also an additional one trillion yuan credit line for small lenders, subsidies for the auto sector and support for low-income families. None of this is still close to what followed the 2008 crisis in terms of magnitude, but the model is similar, i.e., opening up the credit lines, especially through state-run enterprises and local governments. For now, however, the debt risks for analysts, seem to be in control. “Beijing still has sufficient policy tools to avoid systemic financial risk, but a continued rise in the debt-to-GDP ratio is inevitable in coming quarters,” said Ting Lu, chief China economist at Nomura International HK Ltd told Bloomberg. “The risk associated with a further debt buildup will be one of the key tasks Beijing needs to handle in the post-COVID-19 period.”
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