Part of theQuick Takes
Coverage on the coronavirus continues to dominate and overwhelm the airwaves. While the spread of the virus is showing signs of slowing in China and people there are returning to work, the U.S. and the rest of the world are starting to prepare for the worst. In the U.S., the Center for Disease Control warned last week about a potential pandemic, which caused mass sell-offs in the stock market resulting in its worst week in history.
The continuing spread of the disease around the world and the unknowns about its cause have raised fears around travel, attending sports and cultural events, and even eating in restaurants. This growing fear of contact with others, given the little information that exists about how the virus spreads and the limited precautions that are recommended for avoiding it, is taking an economic toll on small and medium-sized businesses in countries hardest hit by the virus. The result could be a global recession if the virus is not contained adequately in developing countries and the need for financial stimulus measures to offset the resulting business losses are not met.
As one of the top two drivers of global economic growth, all eyes are on China’s economy and how and when it will rebound. Based on experience with SARS, MERS, and Ebola, many economists are predicting a “v-shaped” recovery with a steep drop in Q1 followed by a rebound for the rest of the year.
Predictions for China’s annual growth rate vary widely from 4% and up, but down from China’s targeted goal of 6% for the year. Goldman Sachs this week estimates a Q1 growth rate of 2.5% and a 5.5% annual growth rate; the OECD similarly said that 0.5% would be cut from China’s growth this year.
Globally, the OECD said this week that coronavirus could halve the growth rate.
What is China Doing to Shore Up its Economy?
China, for its part, is continuously rolling out measures to shore up the economy. The measures have targeted support for struggling SMEs, cutting interest rates, and improving liquidity. State-owned enterprises should weather the storm as they are backed by the government; it is companies in tourism, transportation, real estate, traditional retailers, restaurants and the entertainment sectors that are the hardest hit. The government is trying to find ways to get money into the hands of the private sector, especially the small and micro-enterprise, which are the engine of growth for the economy.
The following is an overview of some of the more targeted measures that have been taken by the Chinese government in the past few weeks. This is not an exhaustive list and the situation is evolving daily.
Key fiscal measures
· Boost agricultural production
- Stabilized – or even raised – the minimum purchase price for rice
- Extended loans and relaxed loan guarantee requirements to poultry farmers
· Worker protections
- Lowered/waived employers’ social insurance contributions
- Deferred payments to housing funds
- Outlined measures to prevent massive lay-offs
· Tax cuts
- Waived value-added taxes for small firms in Hubei from March to May
- Lowered tax rate to 1% from 3% for small firms in the rest of the country
· Price controls
- Lowered electricity prices for high energy-consuming sectors
- Prevented large price increases overall
Key monetary measures
· SME support
- Encouraged state-owned banks to increase SME lending by more than 30% from last year; commercial banks to lower interest rates for SME lending
- Policy banks to offer RMB 350 billion (US$50 billion) in special credit quotas for private and small firms
- Injected RMB 800 billion (US$115 billion) for re-lending and rediscounting funding to commercial banks for loans to small firms and the agricultural sector
· Lower interest rates
- Lowered the rate on RMB 200 billion (US$28.5 billion) one-year medium-term lending (MLF) loans
- Lowered rates by 10 basis points to 3.15% -- the lowest since 2017
- Lowered benchmark borrowing rate for new corporate and household loans: one-year loan prime rate lowered from 4.15% to 4.05%,and five-year loan prime rate from 4.8% to 4.75%
· Grace periods
- Excluded defaults resulting from the coronavirus outbreak in non-performing loans for a period of time
- Offered delays to the end of Q2 to qualified small- and medium-sized businesses nationwide with principal or interest due between January 25 and June 30
- Rolled over maturing loans and exempting penalties on interest payment delays for firms in Hubei or qualified small firms in the rest of China, until the end of June
Incentives for foreign firms
China’s Ministry of Commerce (MOFCOM) has issued two circulars over the past month specifically aimed at helping foreign companies. To date, foreign companies have reported that these have not yet been implemented, however.
· On February 10, the Circular on Strengthening Services to Foreign Enterprises and Attracting Investments During the Coronavirus Epidemic was issued directing local governments to set up active lines of communication with and bolster online resources for foreign investors and foreign-invested companies and help to resume normal operations. The circular covers addressing labor shortages, providing support to foreign employees and their families, address disruptions in construction, setting up fast-tracking services, and ensuring land use, labor, and hydropower protection.
· On February 18, the Circular on Stabilizing Foreign Trade and Investment and Stimulating Consumption in Response to the Novel Coronavirus Pneumonia was issued. Directives to local governments to enact supportive policies to shore up the business confidence of foreign firms and reiterates the need to communicate closely with foreign investors. The circular also promotes accelerating approvals for import/export licensing, cooperating with insurance agencies to deal with issues such as unexpected order cancellations, and help companies set up cross-border e-commerce and take advantage of free trade zones.
Other measures under consideration
· PBOC is considering cutting the benchmark deposit rate for the first time in five years
· PBOC said last Thursday that it will ensure ample liquidity through targeted reserve requirement ratio (RRR) cuts for banks at an appropriate time
The Impact of the Virus Beyond the Economy?
Both political and economic consequences are coming into focus as the virus spreads. On the political side, there is a chance that President Xi could come out of this stronger. Despite a slow start, the Chinese government moved drastically to stop the spread of the virus across the country. The economy slowing down a half percentage point of predictions is not likely to hurt President Xi if the turn around is clear by the summer. He will, however, likely be tarred globally by China being “home” to one of the first pandemics in modern history. At home, the case is still out on whether this will hurt or help him in the longer run.
Economically, with the US and China accounting for about 40% of global growth. If the virus causes a slow down in both countries, which is virtually guaranteed, it could spark a global recession, which might hit around the time of the U.S. election.
Also, the coronavirus is a meaningful test case for advocates of decoupling.
In China, advocates are waiting to see how the economy will fare as a result of the virus-forced “decoupling” with the closing of factories, the stopping of the global transportation systems, and a slowdown in global trade. They view this as supporting China's ability to withstand a break down in the supply chains.
Critics in the U.S. also use the coronavirus as further evidence that decoupling is imperative citing our over-reliance on Chinese supply chains. No matter what, China essentially shuttering businesses for several months from the virus has underscored one of the major lessons of the trade war: supply chains must diversify, which is different from decoupling totally. Diversification by both Chinese firms who no longer view the US as a reliable supplier as well as American firms concerned about further sanctions against China and rising national security concerns is already occurring. The onset of the virus is further encouraging this trend.
Throughout the crisis, however, China has been eager to show that it will honor its phase one trade commitments to the United States. There has been a steady stream of news highlighting progress: China is on track to honor agricultural purchases; MasterCard’s bank card clearing license application was accepted at long last; all poultry products from the U.S. (including live birds) were approved for import; and, China conditionally lifted the ban on beef and beef products for cows 30 months and above. Both sides announced the list of products eligible for tariff relief as well. The Administration, unsurprisingly, has been pleased with the progress.
For companies, this is a good opportunity to press for action on your issues. Demonstrating that you are engaged and remain committed to the market will be appreciated now and in the long run.