China's economy in worst downturn since '70s in virus battle

China’s economy shrinks 6.8 per cent compared to last year – the worst downturn in almost five decades – as coronavirus pandemic shuts factories and closes shops

  • People’s Republic of China reports first-quarter results from 2020
  • Results are worst since China introduced market-style reforms in the 1970s 
  • Forecasts predict long road to recovery for second largest economy 
  • Asian stock markets on Friday rose as announcement was in line with forecasts 
  • Learn more about how to help people impacted by COVID

China suffered its worst economic contraction since at least the 1970s in the first quarter as it fought the coronavirus, and weak consumer spending and factory activity point to a longer, harder recovery than initially expected.

The world’s second-largest economy shrank 6.8 per cent from a year ago in the three months ending in March after factories, shops and travel were closed to contain the infection, official data showed Friday.

That was stronger than some forecasts that called for a contraction of up to 16 per cent but China’s worst performance since before market-style economic reforms started in 1979.

Some forecasters earlier said China, which led the way into a global shutdown to fight the virus, might rebound as early as this month. 

Activity started to improve in March after China’s outbreak eased and the ruling Communist Party allowed factories to reopen, but analysts have been cutting growth forecasts as negative trade and other data pile up.

‘I don’t think we will see a real recovery until the fourth quarter or the end of the year,’ said economist Zhu Zhenxin at the Rushi Finance Institute in Beijing.

An employee works on the production line of surgical masks at Yilong Medical Instruments Co amid the coronavirus outbreak on Thursday in Zunyi, Guizhou Province of China

Asian stock markets rose following the announcement, which was in line with investor expectations. 

At midday, Tokyo’s benchmark Nikkei 225 index was up 2.6 per cent and Hong Kong’s Hang Seng was 2.2 per cent higher.

Retail spending, which supplied 80 per cent of China’s economic growth last year, plunged 19% in the first quarter from a year earlier, below most forecasts. 

Investment in factories, real estate and other fixed assets, the other major growth driver, sank 16.1 per cent.

Factories and other businesses were allowed to reopen even as the United States and Europe tightened controls. 

Cinemas, hair salons and other enterprises that are deemed nonessential but employ millions of people are still closed. Tourism is struggling to recover.

China has reported 3,342 deaths among 82,367 cases of the novel coronavirus that emerged in December in the central city of Wuhan. 

The government reported 26 new cases and no deaths in the 24 hours through midnight Thursday.

Controls on Beijing, the capital, and some other cities have been tightened to prevent a resurgence of the disease. 

Most foreigners are barred from entering the country.

Consumer spending is slow to recover despite government efforts to encourage spending by giving out shopping vouchers in some cities and launching a media campaign showing officials eating in restaurants.

Many would-be shoppers are holding onto their money out of fear about possible job losses. Others are reluctant to venture into supermarkets or even leave their homes.

That is a blow to automakers and other companies that hope China will power the world economy out of its most painful slump since the 1930s.

‘I will definitely be more thrifty,’ said Zhang Lizhou, a 26-year-old marketing manager in Beijing.

Zhang said his company, which has yet to reopen, is paying him 1,500 yuan ($215) per month but his finances are strained paying a mortgage. 

An employee wears a face mask as he works at a blower and fan manufacturing plant in Anshan in northeastern China’s Liaoning Province on Wednesday

His girlfriend lost her job when her employer failed due to the epidemic.

‘I will save money to get through possible difficulties,’ Zhang said. 

‘If I had done that, I wouldn´t be like what I am now – anxious but unable to do anything.’

The ruling party appealed to companies to keep paying employees and avoid layoffs.

It is promising tax breaks and loans to help entrepreneurs get back on their feet. Still, a wave of bankruptcies has flooded the job market, adding to economic anxiety.

Auto sales sank 48.4 per cent from a year earlier in March. 

That was better than February’s record 81.7 per cent plunge but is on top of a 2-year-old decline that already was squeezing global and Chinese automakers in the industry’s biggest global market.

Exports declined 6.6 per cent in March from a year ago. 

That was an improvement over the double-digit plunge in January and February, but forecasters warn exporters likely face another downturn as the fight against the virus depresses US and European consumer demand.

‘The upturn will be slowed down by lingering consumption weakness and sliding foreign demand,’ said Louis Kuijs of Oxford Economics in a report. 

He said it might be the fourth quarter before economic growth reaches a level of 4 per cent over the previous year.

For the full year, forecasters including UBS, Nomura and Oxford Economics say China will have little to no growth.

The ruling party has yet to announce this year’s official growth target. It has been at least 6 per cent in previous years. 

Beijing looks likely to miss its target of doubling incomes from 2010 levels by this year.

The operator of a still-shuttered fitness center in the western city of Xi’an said he doesn’t know whether the business will survive.

‘The business may go bankrupt, and I would have to find something else to do,’ said the owner, who would give only his surname, Liu.

Beijing is trying to prop up activity by spending more on building next-generation telecoms networks and other projects. 

But the ruling party doesn’t want to pump too much money into the economy for fear adding to debt or pushing up inflation that is near a seven-year high.

Chinese leaders probably will adopt stimulus measures at least as big as their response to the 2008 crisis but will emphasize ‘quality instead of quantity,’ said Zhu at the Rushi Finance Institute.

He said money was likely to go to technology development and social welfare instead of construction, as it did in 2008.

Last year’s economic growth sank to a multi-decade low of 6.1 per cent under pressure from weak consumer demand and a tariff war with President Donald Trump that depressed exports.

‘The epidemic has amplified the problems, so the pace of recovery will be much slower,’ said Zhu. 

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