China: Q1 Downgrade to under 4%

Published on February 3, 2020

China’s Premier Li Keqiang, who has been tasked to lead the novel coronavirus prevention and control task group of the Communist Party of China’s Central Committee, convened a high-level expert team of the National Health Commission (NHC) on Friday in Beijing to review the latest developments and to discuss the economic impact of the virus and measures to attempt to stabilize markets:

*** Perhaps most significant for financial markets, Friday’s meeting concluded with a further downgrade in GDP growth to below 4% for Q1 of 2020, barely one week after the estimates were initially lowered to 4.5%. ***

Specifically, from what we understand, in the meeting on Friday in preparation for the market open on Monday, Li stressed that the country will be facing a “very difficult” situation in Q1, and that it would be a good result if Q1 GDP were to reach 4% in the first quarter of 2020.

To put that in perspective, as recently as a week ago, Tuesday, the NDRC had pegged GDP to drop by 1.5 percentage points, from 6% in Q4 2019 to 4.5% in Q1 2020. That estimate was predicated on the assumption that the disease would peak in mid-February (see SGH 1/30/2020, “China: The Coronavirus Damage”).

As to the virus itself, the NHC noted that of the 213 fatalities as of Friday, January 31, 204 of them were in Hubei province (189 in its capital of Wuhan). Furthermore, they noted that of the 213 deaths, 75% of the victims were over the age of 60, 86% suffered from multiple illnesses, and that the death rate was coming in still at a little over 2% of identified cases.

Since Friday, the reported death toll has risen to 361, albeit the vast majority, 350, is still contained in Hubei (265 in Wuhan). But of perhaps greater concern is that in private, even senior officials who accompanied Premier Li to Wuhan for inspection a few days ago confide that the number of confirmed cases nationwide could reach over 40,000.

The rumor mill, as may be expected, have numbers that are all over the place, including some much higher than that.

Attempts to Stabilize Growth and Markets

Once the epidemic has been brought under control, Beijing’s number one priority, Li stressed at Friday’s meeting that the State Council would take aggressive measures to stabilize growth by stimulating industrial production and encouraging consumption.

Liu Kun, China’s Finance Minister, noted in the meantime that the MOF had allocated 29.7 billion yuan (approximately $4 billion) for epidemic prevention as of Friday, January 31 – including a release of 18.5 billion yuan from the Premier Fund between January 27 and 31.

As a reminder, on Sunday, January 26, President Xi Jinping and China’s top decision making body, the Standing Committee of the Political Bureau of the CPC Central Committee, had approved the release of 50 billion yuan from the “rainy day” Premier Fund to fight the novel coronavirus outbreak (see SGH 1/27/2020, “China: Assessing the Wuhan Coronavirus”).

Following Li’s instructions, Vice Premier Liu He presided over a meeting on Saturday in advance of the markets’ open that was attended by the heads of the top four Chinese financial authorities — the People’s Bank of China, China Securities Regulatory Commission, the State Administration of Foreign Exchange, and the China Banking and Insurance Regulatory Commission — to prepare a series of measures to “promote financial support for the prevention and control of the novel coronavirus outbreak, to guarantee daily necessities supply, and help ensure stable growth of the real economy.”

At the meeting, it was decided that the PBoC would inject 1.2 trillion yuan (about $170 billion) of liquidity into the markets when they opened on Monday through reverse repurchase operations.

While the vast bulk, over 1 trillion yuan, of that 7 and 14 day liquidity was to simply replenish funds that were rolling over, authorities noted that on a year on year basis it would still leave China’s banking system with 900 billion yuan in extra liquidity compared to the same period last year.

The PBoC also pledged to provide 300 billion yuan in low-cost special re-lending funds to major national as well as to some local commercial banks.

Finally, the CSRC was tasked to prepare measures “to prevent risks and ease market panic,” while SAFE was instructed to guide the Renminbi “in an orderly fashion.”

If needed, that means SAFE has been instructed to intervene in case of “too sharp” and disorderly of a devaluation of the RMB, to smooth markets.

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