Commentary on Political Economy

Wednesday, 1 April 2020


China’s economy has yet to reach bottom Despite improving manufacturing sentiment, Xi Jinping likely to face high unemployment TOM MITCHELL 

For Xi Jinping, the good news is that China’s economy appears to have performed slightly better in March than in February. The bad news is, that is about as far as the good news goes for now. If the world’s second-largest economy is not performing markedly better by the end of June, China’s powerful president could face unprecedented economic and political challenges, ranging from double-digit unemployment to the country’s first official recession since 1976. “The real unemployment rate in China is likely to go higher than 10 per cent for sure,” said Diana Choyleva, chief economist at Enodo Economics in London. “Q2 [economic activity] is shaping up to be very weak as disruptions to production in China linger and, more importantly, demand from the rest of the world evaporates.” On Tuesday, markets were briefly cheered by the release of the official purchasing managers’ index of the National Bureau of Statistics. This showed that, relative to February, more manufacturers than not are now experiencing a modest expansion in business activity. Considering that China’s economy was brought to an almost total halt in the first half of February by the coronavirus epidemic, one survey saying things are slightly better is hardly reassuring — a point the NBS’s chief statistician drove home as well. The world will have to wait for two more weeks before a fuller picture is available, with the release of full first-quarter data ranging from exports to GDP. That data is unlikely to be much better than the raft of record-low indicators recently released for January and February. Earlier this week a team of ANZ economists led by Betty Wang projected that China’s first-quarter GDP would fall 9.4 per cent year-on-year, with another annual decline of up to 2.1 per cent possible in the second quarter. For March Ms Wang is anticipating double-digit year-on-year falls in industrial production (-11.7 per cent), fixed asset investment (-18 per cent) and property investment (-12.0 per cent). 

This would at least be better than the January-February period, when fixed asset investment was down almost 25 per cent year-on-year, but would also indicate the Chinese economy has yet to reach bottom. For China’s leaders, such headline numbers are, for now, mere surface noise. As premier Li Keqiang recently put it, economic growth “does not matter that much” as long as the government’s employment targets — typically 10m or more new urban jobs a year — are met. Over the first two months of the coronavirus crisis, Mr Xi’s administration has instead focused on staunching the bleeding. According to a count by Sarah Tong and Yao Li at the National University of Singapore’s East Asian Institute, since January 24 various ministries have issued more than 20 policy directives, almost all of them directed at helping companies stabilise their operations and avoid lay-offs. Recommended AnalysisCoronavirus How Asian companies adapted to coronavirus Despite this focus, the government’s official unemployment rate came in at a record high 6.2 per cent in February. A continued rise in unemployment into double-digit territory over the coming months, as Ms Choyleva predicts, would represent a grave social and political challenge for Mr Xi’s administration. Unfortunately for the Chinese leader, China’s state-owned banks have a patchy record when it comes to extending credit to small and medium-sized employers, even when they are ordered to. State banks’ incentive systems, which tend to hold loan officers responsible when money is not repaid, are ultimately stronger than directives from on high to lend to riskier private-sector borrowers. 

This trickle-down approach to credit allocation is even less effective when it comes to directing credit to the millions of mom-and-pop restaurants, hair salons and other street-level businesses who typically have few if any assets of their own to offer up as collateral. 

“Banks’ [lending] decisions are still commercially driven,” said Ms Wang at ANZ. “If they see rising risks, I don’t think they will lend more to SMEs that are suffering.” If so, just when it seemed to be peaking Mr Xi’s coronavirus crisis may in fact be entering a new and even more dangerous phase.

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