China's Economy Expected to Shrink in The First Half

An analysis by Michael Lelyveld
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china-auto-plant-wuhan-mar23-2020.jpg A Chinese employee wears a face mask as he works on an assembly line at the Dongfeng Honda auto plant in Wuhan, central China's Hubei province, March 23, 2020.

As China's economy struggles to recover from the COVID-19 epidemic, analysts are trying to estimate how much damage has already been done.

Government agencies and official media have issued a series of positive statements about signs of renewed economic activity this month after a near-total stoppage in February.

But evidence of a turnaround appeared cherry-picked and partial at best.

Last week, for example, China's top planning agency said the daily rate of power production on March 16 had climbed 9.9 percent compared with late February, the official Xinhua news service reported.

The increase followed a steep 7.8-decline in electricity consumption in the first two months of the year from the year-earlier period, the National Development and Reform Commission (NDRC) said.

Most of the official statements on the prospective recovery have remained highly qualified.

On March 19, a Ministry of Commerce official said that 67 percent of China's key firms involved in foreign trade had recovered more than 70 percent of production capacity, but the estimate excluded the viral epicenter of Hubei province.

Similarly on March 17, the NDRC said that over 90 percent of major industrial enterprises had resumed work, but the figure again left out "certain areas including Hubei."

Some foreign reports voiced skepticism about the rapid recovery figures.

On March 17, Australia's Sydney Morning Herald cited reports that "factory managers are faking resumption statistics in some cases," by turning on lights and machinery.

"When supervisors in Beijing or provincial capitals check up by looking at the electricity consumption figures, they see what they want to see — power use is humming, even though the factories are not producing accordingly," the paper said.

Clouded optimism

This week, hopes for a speedy economic recovery rose as the government lifted travel restrictions in Hubei and allowed limited bus service in the epicenter of Wuhan.

But optimism was clouded after a leading brokerage announced a major downward revision in its economic growth forecast for China this year.

China International Capital Corp. (CICC) now expects China's gross domestic product will rise only 2.6 percent this year, down from a 6.1-percent forecast in January, the South China Morning Post said.

Full pre-crisis production is unlikely until China's migrant workforce is in place.

As of March 7, only 78 million migrant workers had returned to their jobs, representing 60 percent of those who had left for the extended Lunar New Year holiday, the Ministry of Human Resources and Social Security said, according to Bloomberg News.

In a stroke of bad timing for analysts, both the battle against the coronavirus and the claims of economic recovery have fallen into the annual statistical reporting gap of the holiday period.

The usual doubts about the accuracy of NBS data have been compounded with political pressures to put the best face on the government's management of the crisis.

Hard evidence has been largely limited to NBS reports for the first two months of the year, released on March 16, indicating a steep economic decline.

Among the signs, industrial output for the January-February period fell 13.5 percent from a year earlier, while retail sales plunged 20.5 percent and fixed-asset investment plummeted 24.5 percent, the NBS said.

On Tuesday, the Ministry of Finance reported that the government's fiscal revenue in the first two months was down 9.9 percent.

With such dramatic drops, the tentative signs of recovery in March did little to improve the outlook for first-quarter growth.

China's GDP was initially projected to dip to 3.5 percent from 6 percent in last year's fourth quarter, according to a median forecast reported by Reuters in a survey on March 3-5.

In the poll of 40 economists, not a single forecast called for negative growth, although two banks called for no growth at all, the news agency said.

Since then, expectations of negative growth in China have spread along with the epidemic and warnings of a worldwide recession to come.

"The evolving news on COVID-19 has triggered 'forecast leapfrogging,' with economists and strategists repeatedly lowering their forecasts," Ethan Harris, head of global economics at Bank of America, told Reuters on March 19.

Chinese employees wear protective face masks as they work at the Yanfeng Adient Seat Company Ltd., which manufactures car seats, in Shanghai, China, Feb. 24, 2020. Wide range of estimates

Even if China has started to stage a partial recovery in March, it may face the risk of being dragged back by the developing epidemic and unfolding recession in the rest of the world.

With little solid evidence for a March bounce back to go on, economists have offered a wide range of estimates of China's first-quarter results, running from low single-digit growth to double-digit contraction.

Perhaps the most stunning forecast of China's contraction comes from the international research firm Capital Economics, which projects a 16-percent drop in first-quarter GDP from a year earlier and a loss of 20 percent from the quarter before.

"Given the shock to incomes and employment, the continued concern about the threat of further infections within China, and the growing disruption to contain the virus overseas, recovery will take several quarters, even with stimulus providing a tailwind," the firm said.

The analysts have been tracking not only the two-month official figures but also a range of daily indicators including passenger traffic, coal use at power plants and intensity of night lights at 143 industrial parks.

Other estimates project a less drastic downturn, but still a historic decline.

In a blog posting at the Washington-based American Enterprise Institute on March 16, resident scholar Derek Scissors revised down his previous forecast of a 2.4-percent year-on-year decline in the first quarter made at the end of February.

Scissors cited the two-month figures and an NBS report that the urban surveyed unemployment rate had risen by 1 percentage point to 6.2 percent, a rare official acknowledgment of job losses.

Scissors said his earlier forecast of a 2.4-percent decline had been "too cautious."

"March will be stronger, but not nearly enough to achieve only a 2.4-percent contraction," he said.

Since then, the outlook has been divided between official reports that nearly 90 percent of enterprises and projects have restarted and the implication that activity is down by over 10 percent.

In an email message on March 19, Scissors said that, "with obvious guesswork for March," the quarterly GDP decline may now be near 11 percent.

"I'm more confident that first-half GDP growth will also be negative, maybe close to minus-2.5 percent, or somewhat worse," he said.

Recovery time

This week, the China Beige Book, which surveys more than 3,300 Chinese businesses, said it was "not unreasonable" to anticipate a first-quarter contraction of 10-11 percent, CNBC reported.

Contractions of that magnitude raise the question of how long it will take for China to recover in terms of either positive growth or rates approaching those of 2019.

"How long it takes to dig out depends partly on the world. They'll be lucky to hit 2-percent annualized growth in 2020," Scissors said.

Gary Hufbauer, senior fellow at the Peterson Institute for International Economics, expects a less drastic decline in the first half, noting reports that economic activity in Shanghai is starting to resume.

"While the first and second quarter GDP numbers will be down, I think 16 percent down is way too much. A drop of 5 percent seems more in line with facts on the ground," Hufbauer said.

"Accordingly, I expect annual GDP growth to reach 3 percent to 4 percent. In other words, a sharp rally in the second half," he said.

As in past crises, China is relying on massive infrastructure spending to provide stimulus for the economy.

More than 20 provincial and municipal governments have announced projects worth nearly 7.6 trillion yuan (U.S. $1.07 trillion) this year, the official English-language China Daily said.

On March 21, an NDRC official said that 97.8 percent of the agency's 533 key transportation projects were under construction and that all major rail projects had resumed, Xinhua reported.


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