The external threat to China's economy threatens to spoil Xi Jinping's propaganda victory over the health crisis. As the rest of the world faces soaring infection rates, China is reporting almost zero domestic cases and state-controlled media is trumpeting government stimulus measures they say will underpin an economic bounce back. But while the government objective is to resume economic activity, any policies that address the threat of a further outbreak will take precedence.
Even if China contains a second wave of imported infections, hopes for a bounce back collapsed when the country's major trading partners got sick. Stocks and bonds have shown resilience, but that confidence is not reflected in record-low economic data and the risk of collapse for thousands of small companies.
China has in recent weeks reported its weakest trade data since the global financial crisis. For starters, exports fell 17.2 per cent in January and February, while industrial production for for the same period shrank 13.5 per cent.
Retail sales plunged 21 per cent. Unemployment rose from 5. 2 per cent at the end of last year to 6.2 per cent in January February.
China's Beige Book, which surveys thousands of Chinese businesses, expects GDP to contract more than 10 per cent in the first quarter. Standard & Poor's last week cut its China GDP growth forecast for 2020 to 2.9 per cent. But many economists warn these forecasts are underestimating how much a global recession will damage China.
Nor are worst-case scenarios reflected in Chinese propaganda. However, Mr Xi said on Friday the country would allow its fiscal deficit limit to widen beyond 3 per cent of GDP, and sell special government bonds to finance the shortfall.
This followed a virtual meeting of the G20. China has not yet released its economic forecasts for 2020 because the outbreak forced it to delay its key political meeting.
Tang Jianwei, chief economist at the Bank of Communications, said the Chinese economy faced four threats just as it was getting back on its feet: the risk of a second outbreak; the hit to China's capital markets and currency from global financial market turmoil; dwindling demand for exports; and interrupted supply chains.
"China’s manufacturers have resumed operations but they will be affected by the suspension of overseas suppliers due to the pandemic. Beside, raw material supply, such as crude oil, LNG, iron ore and metals will be exposed to the risk," he said.
"This means the rebound of China economic growth in the second quarter won’t be as strong as we had expected. We have to lower our expectation on China’s GDP growth," he said.
Nomura said markets were underestimating the slump in external demand.
"We believe markets might still be too optimistic about China’s GDP growth in general and export growth in particular," Ting Lu, Nomura chief China economist, said. Nomura forecasts a 0.9 per cent GDP contraction in the first quarter, zero growth in the second quarter and 1.3 per cent for the year.