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A Month After Peak Coronavirus In China, Beijing Needs More Stimulus

China has been battling the deadly coronavirus Xi Jinping calls a “demon” for the past three months. The economy is not back to normal.

From afar, it appears as if China’s bout with the latest version of the SARS coronavirus is wearing out. China is still getting back to work, even as numerous quarantine measures persist, from closed movie theaters, to masks needed in public.

But despite the virus having hit its peak in Hubei province back in mid-February, the Chinese economy needs more stimulus as its main trading partners are now inundated with COVID-19, the lower respiratory tract infection caused by the new SARS coronavirus.

The Chinese Communist Party’s Politburo, China’s top decision-making body, convened on Friday and issued a briefing about the next steps to get the economy growing again.

Over the weekend, the South China Morning Post estimated that China has at least 10 million people unemployed in a best case scenario. How these people react to being unemployed in the coming days will be crucial for Beijing.

“Details are scant, but the contour of the (new Beijing) package suggests a more proactive fiscal policy that includes a higher deficit, more bond issuance,” says Aidan Yao, senior emerging Asia economist at AXA Investment Managers.

Yao estimates China will spend around 3.5% of GDP and will cut interest rates.

However, due to the unique nature of the virus-led shock to the economy and Beijing’s limited policy space, China is unlikely to repeat its mega 2008-09 and 2014-16 stimulus packages, Wall Street analysts seem to believe.

But, should a second wave of infections appear now that Hubei migrant workers are returning to work, all bets are off from China growth in 2020. Chinese officials took to the local media over the weekend to assuage fears that healthy people who have the coronavirus but do not know it can spread the virus to others, possibly making them sick. Asymptomatic people can indeed spread SARS-CoV-2.

Meanwhile, investment firms like Nomura have China GDP growing at around 1.3% this year because of the pandemic that spread from Hubei, a low not seen in over 20 years.

Roughly six weeks after the World Health Organization called a peak in China’s coronavirus infection rate, schools across China have not yet re-opened in full. Some cities, including Shanghai, have not opened movie theaters out of fear of overcrowding and costs associated with constantly disinfecting the place.

Last week, China stepped up counter measures against imported cases, as the number of COVID-19 cases has grown in recent weeks due to travel. Nearly 400 cases were diagnosed last week, all reportedly from Chinese locals returning from abroad.

Shanghai and Beijing infection rates are the ones to watch. If they approach 1,000, the cities will go on lockdown swiftly. Both have under 200 cases each, though it is worth noting that around two weeks ago, Shanghai had around 22 cases.

Like the U.S., China will learn it needs a bigger bazooka — financial market jargon for government stimulus from the finance ministries and legislators.

China does not want to keep stimulating the economy like this. After calling the U.S. and Taiwan “xenophobic” for travel restrictions back in January, the Chinese government has announced the suspension of entry by all foreigners, including those with legal residency. The government is also requiring all airlines to limit international flights to one flight per country per week.

This is a near total destruction of China’s travel and tourism industry, an industry that employs tens of millions. It will not recover in the second quarter and perhaps not even in the third.

Besides domestic demand destruction for restaurants, malls and travel, China is also confronting a significant drop off in demand from the rest of the world.

Chinese equity markets have done better than the FTSE Europe, S&P 500 and the MSCI Emerging Markets, but that is thanks to the central bank and other policy banks in China buying stocks. They look good, but they’re not good.

“We think there are still a lot of earnings downgrades to come,” says Louis Lau, director of investments at Brandes.

For short term trades, Thailand telecom infrastructure with high dividend yields that have been beat up lately offer good value, he says without naming names.

For longer term holds, Lau says the top banks in Indonesia, Philippines and Thailand are all “very well-capitalized and well-positioned” to absorb any credit losses from corporations. Governments there have also announced measures to boost lending to small and mid-sized businesses and offer banks relief on non-performing loans.

Last week, UBS conducted a survey of investors and business owners about their investment outlook globally.

Some 42% said they were not buyers unless the markets corrected another 5% to 20%. In a sign of growing pessimism among UBS clients regarding the length of fthe coronavirus crisis, 33% said this will continue until December, up from 25% who said so earlier in the month.
Source: Forbes

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