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Bloomberg Economics
The coronavirus threatens a blow to Chinese and global growth. With the situation on the ground
changing fast, both rapid containment and escalating contagion are possible. Precise forecasts are
not. Even so, the experience of the SARS outbreak in 2003, changes in the Chinese economy since
then, and the interlinkages between China and the world provide a basis for thinking through the
central scenarios. This report brings together highlights of Bloomberg Economics’ ongoing analysis of
the emerging risk to Chinese and global growth. For Bloomberg Economics latest view on the virus,
and other issues impacting the global economy, visit BECO<GO> on the Bloomberg Terminal.
Contents
4 Virus May Drag China GDP to 4.5% — First Published Jan. 31
8 How Coronavirus Can Infect Global Supply Chain —First Published Feb. 10
12 Virus Epicenter-Hubei Province in Charts — First Published Feb. 10
14 Tracking the Virus—Timeline of Cases, Measures — First Published Feb. 6 *
16 China Crisis Fighting Focus to Shift Toward Growth — First Published Feb. 4 *
17 Coronavirus Infection Costing Oil $8 a Barrel — First Published Feb. 4 *
18 U.S. Recovery Can Fight the Virus Without Fed Medicine — First Published Jan. 31 *
19 What Coronavirus Shock Means for ECB, BOE — First Published Feb. 4 *
20 Virus Clobbering Japan, Hong Kong, Asean — First Published Feb. 3 *
21 Tackling the Virus Impact in Stages: Policy Map — First Published Feb. 11
23 Contacts
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Bloomberg Economics
We explore scenarios for the suffer a bigger blow. China’s measures to block the spread of
potential impact of the 2020 GDP growth could slow the disease:
coronavirus on Chinese and to 5.6%.
global growth, drawing on the Travel restrictions have been
experience of the 2003 SARS This kind of empirical exercise imposed on Wuhan -- the
outbreak, changes in China’s provides a useful way to think capital of Hubei province and
economy since then, and a large- through the potential economic epicenter of the outbreak --
scale model of the global impact of the virus. The risk is and widened to almost the
economy: that it gives a false impression of entire Hubei province -- a
certainty, when the situation on population of 59 million.
In a containment scenario, the ground in China is evolving The central government has
with a severe but short-lived fast. Rapid containment and launched an aggressive
impact, the virus could take escalating contagion are both campaign to raise public
China’s first-quarter GDP possibilities, and would result in awareness, advising people to
growth down to 4.5% year on widely different growth impacts. avoid traveling and
year, a drop from 6% in the gatherings. Restaurants,
final period of 2019 and the Extreme Measures hotels, and tourist sites --
lowest since the quarterly data With the number of confirmed normally crowded for New
begins in 1992. cases rising above 40,000, and Year celebrations -- have seen
A recovery in the second the death toll hitting 908, China’s business slump.
quarter and stabilization in the government is taking extreme
second half would leave 2020
GDP growth at 5.7%, down
from 6.1% in 2019 and -0.2 ppt
below our forecast before the Virus Impact on China
outbreak.
Looking outside mainland
China, Hong Kong faces the
biggest blow, with 1.7 ppts
shaved off first-quarter GDP
growth. Asian neighbors Korea
and Japan would also take a hit.
Further away and with weaker
trade ties to China, the U.S and
euro area would face drags
around 0.1 ppt.
In a prolonged outbreak
scenario, with containment of
the virus delayed into the
second quarter, the Chinese
and global economies would Source: Bloomberg Economics
4
Bloomberg Economics
The Lunar New Year break has consumption growth 0.6 ppt than it was in 2003 -- a fact
been extended to Feb. 2 from above the baseline. Those that cynics will attribute to
Jan. 30, a reduction of three assumptions are motivated by statistical smoothing, but is
working days. Shanghai, several considerations: also a reflection of a maturing
Guangdong, and Zhejiang -- economy.
China’s main economic Putting those pieces together,
engines -- have said The outbreak is occurring we end up with a smaller
businesses can stay closed during the New Year holiday -- percentage-point drop in
until Feb 10. Some companies peak time for consumption. consumption growth than
have halted production or told Spending that would have during the SARS episode, but a
workers to work from home. taken place during the larger standard deviation move.
festivities won’t be recouped Thinking about the recovery,
These measures -- critical for afterward. we note that a large part of
limiting the spread of the virus -- The current travel restrictions the blow to consumption is
mean a heavier toll on the are much wider than those expected to come from
economy in the short term, with imposed during the SARS reduced spending on services.
the impact broadening from period. There were no As such, much of it will be lost
consumption to a blow to measures locking down cities rather than delayed. After the
production and supply chains. in 2003, and no extension of a outbreak, we expect
national holiday. consumption to return to
The starting point for our The volatility of China’s growth trend, not bounce significantly
assessment of the potential is significantly smaller now above it.
economic impact is what
happened during the SARS
outbreak in 2003. Back then,
consumption growth fell 4.6 Containment Scenario
ppts, or 1.5 times the standard
deviation for the five-year
period.
5
Bloomberg Economics
Investment maintained blistering impact on China’s growth. Our A sharp drop in the first quarter,
growth during the SARS episode. analysis suggests it could fall to followed by a recovery in the
This time around, we assume an 4.5% year on year in the first second and stabilization in the
impact, with capital spending quarter, down from 6% in the latter half, would leave China’s
dropping 2.4 ppt below our fourth quarter of 2019, and 1.4 growth for the year at 5.7%,
baseline forecast in the first ppts below our forecast before down from 6.1% in 2019 and 0.2
quarter of 2020, before rising the outbreak. ppt below our baseline forecast
0.9 ppt and 0.4 ppt above in the ahead of the outbreak.
following two quarters as During the SARS episode, GDP
delayed projects get started. dropped a full 2 ppts, falling Prolonged Outbreak
That is motivated by a number of from 11.1% in the first quarter of What happens if the virus is not
assumptions: 2003 to 9.1% in the second. The contained? We also ran a
main reason for anticipating a scenario where the outbreak is
There’s already evidence of smaller drop in percentage-point prolonged into the first part of
the virus impact spilling over terms during the coronavirus the second quarter before
from consumption to outbreak is that the volatility of gradually coming under control.
production. The New Year China’s growth is markedly less If that’s how it plays out, we’d
holiday has been extended. than it was 17 years ago. Back anticipate China’s GDP growth
Factories have suspended then, big fluctuations in GDP also slowing in the second
activity. were not unusual. They are now. quarter to 5.4% before
Cold weather at the start of recovering to 6.3% in the third.
the year typically means a stop
to construction activity,
especially in the frozen north.
With the virus striking just as Global Impact
the thaw begins, the timing of
resumption may be delayed.
Falling equity markets -- with
the mainland market down
3.1% on the day before the
New Year holiday -- evidence
a blow to China’s animal
spirits.
6
Bloomberg Economics
Growth for the year as a whole big Western economies would imports as a function of
would come in at 5.6%. face a smaller hit. Germany is domestic demand without
the exception, with a growth distinguishing between
Global Spillovers hit of 0.2 ppt, which would different components of
Back in 2003, China accounted unwind in the second half. The demand. As a consequence, it
for just 4% of global GDP. Fast U.S. and U.K. might see a 0.1 might overstate the impact of
forward to 2020, and its share ppt drag. a virus that registers its
has increased to 17%. That means Assuming the outbreak is biggest effect on the services
the global spillover if China’s contained, most economies sector. Services are mainly
growth slumps will be larger. We would see a recovery in the supplied domestically, with
used NiGEM -- a large scale second quarter, followed by limited impact on imports.
model of the global economy -- stabilization in the second Finally, we assume that the
to estimate where the impacts half. Outside China and a few outbreak is contained to China
would be felt most: close neighbors, the impact -- and so affects other
would be difficult to see in the economies through the
China’s Asian neighbors are full-year growth data. slowdown in China’s growth,
deeply embedded in regional not because they suffer their
supply chains, export to A few caveats to the global own outbreaks.
China’s consumers, and analysis -- pointing in both
benefit from China’s tourist directions:
visitors. Hong Kong stands out
as the most exposed -- our First, NiGEM captures the
simulation shows a hit of 1.7 impact of a China slowdown
ppts in the first quarter. South through trade. It does not
Korea and Vietnam would also capture the impact of a China
suffer, each slowing by 0.4 slump on global sentiment. In
ppt. Japan would take a 0.2 that respect, it might
ppt hit. underestimate the spillovers.
Commodity exporters -- hard Second, the longer factory
commodities for China’s output is affected the bigger
industry and soft commodities the risk China’s dominant
for consumers -- also face a position in global supply
hit. Australia and Brazil could chains disrupts activity
both see 0.3 ppt trimmed elsewhere. We have not
from near-term growth as captured the impact via
demand drops, while South intermediate consumption of
Africa would see a more Chinese exports in other
modest hit. countries.
With smaller export exposure, Third, NiGEM models China’s
7
Bloomberg Economics
China is the world’s largest exporter factories. Global reliance on on supplies from China. About
of intermediate manufactured these inputs for production 30% of all imported U.S.
products -- components destined for has doubled since 2005 as manufacturing inputs came from
use in supply chains across the world. China expanded and supply China in 2015, and the trade war
The longer the coronavirus curtails chains went global. appears to have only had a small
China’s factory output, the bigger the For countries in the Asian effect in weaning manufacturers
risk of disruption elsewhere. Using supply chain, the exposure is off Chinese products.
detailed OECD trade data, we assess bigger -- about 40% of all
which economies are most imports of intermediate
vulnerable: manufactured products
consumed in Cambodia,
About 20% of global imports Vietnam, South Korea and
of intermediate manufactured Japan came from China in 2015.
goods come from Chinese American factories are also reliant
No data
8
Bloomberg Economics
9
Bloomberg Economics
A month ago, economic in Hubei’s capital, Wuhan, on over three weeks -- a period in
conditions in China’s Hubei Dec. 31. More than 40,000 which millions would have
province were of interest mainly people have since been infected, moved in and out of the city.
to its 59 million residents. Now, mostly in Hubei, with
the epicenter of the coronavirus - 908 deaths in China and two Hubei’s GDP came in at 3.9
- under lockdown by the Chinese elsewhere, as of Feb. 9. trillion yuan in 2018, making the
government -- is the focus of provincial economy roughly the
intense global attention. The province, located in central same size as Poland.
Bloomberg Economics sets out China, is tightly linked with other
how Hubei fits into China’s regions. It ranks seventh by Hubei ranks seventh among
national economy, and intersects passenger traffic among China’s the 31 provinces -- accounting
with global supply chains. The 31 provinces, with 983.5 million for 4.3% of national GDP.
main takeaways: travellers in 2018. Wuhan is a Wuhan’s GDP was 1.5 trillion
major junction for railways yuan in 2018, about 1.7% of
Hubei is not a major exporter. crisscrossing the nation. China’s total.
$34 billion in overseas sales in Hubei’s 59 million population
2018 accounted for just 1.4% of Between the first official report of is comparable to that of Italy,
China’s total. That limits the the disease on Dec. 31, and the and accounts for 4.2% of
global spillovers. travel ban on Jan. 23, there were China’s total.
In certain industries,
though, Hubei punches above
its weight. Autos, health care, Confirmed Cases in Mainland China by Province
aerospace and defense, and
construction materials are all
sectors where Hubei factories
loom large, raising the risk of
disruption to supply chains.
Hubei’s debt levels appear
relatively low. That, combined
with targeted liquidity support
from the central bank, reduces
concerns about risks to
financial stability.
10
Bloomberg Economics
11
Bloomberg Economics
construction materials, as of Hubei’s industries largely serve Even so, that doesn’t mean
end-2019. the domestic market. A relatively foreign companies won’t incur
In waste and environment small role in China’s exports collateral damage. A portion
equipment, consumer staples, means less -- though certainly of Hubei’s sales to other
and semiconductors, Hubei not no -- supply-chain risks for provinces will make their way
firms account for more than trading partners. into global supply chains.
5% of total revenue. Bloomberg Intelligence has
We used Bloomberg’s equity- Hubei shipments bound for taken a comprehensive look at
screen function to track revenue external markets totaled $34 industry-level risks from the
for Hubei’s listed firms. billion in 2018, ranking 14th outbreak.
among the 31 provinces.
Hubei’s exports account for In terms of the threat to broader
One small saving grace from an 1.4% of China’s total exports. financial stability for
international perspective -- China, Hubei’s relatively low
12
Bloomberg Economics
13
Bloomberg Economics
Coronavirus cases and deaths ago. That compares with nearly The early signs of economic
continue to rise. China's 8,100 for SARS in 2002-03. The impact are clear. Factories are
response -- necessary to death toll has now exceeded that idle. Shopping malls are
prevent the spread of the virus of SARS. The policy response has deserted. South Korean auto-
-- is having a marked impact on been rapid and far reaching. maker Hyundai has suspended
the economy. To track the Hubei, a province of more than production, citing disruptions to
spread of the outbreak, 59 million people, has been the supply chain from the virus.
measures to contain it, and quarantined. Even as financial markets
early signs of economic impact stabilize after a sharp slide
we have put together an Major centers of business and following the Chinese New Year
annotated chart. industry are shuttered. Russia, break, the combination of rising
Mongolia and North Korea have cases and extreme prevention
The number of cases continues closed their land borders with measures seems set to guarantee
to increase at a torrid pace. China. Several nations have a significant drop in 1Q GDP
barred entry to foreign nationals growth. Our scenario
There were 42,638 confirmed who have traveled to the analysis flags the risk of a
global cases as of Feb. 11, up mainland. slowdown to 4.5%.
from almost 12,000 a few weeks
Coronavirus Timeline
14
Bloomberg Economics
Tracking the Impact reopened on Feb. 3 after the financial stability. We look at two
What impact will the coronavirus extended Lunar New Year break. measures -- corporate credit
have on China's economy? spreads, and the premium non-
China's 1Q data calendar is In the days that followed, with bank financial institutions pay for
sparsely populated so it won't be bad news from the break priced funding. In episodes of financial
until mid-March that investors in and the expectation of stress, both would be expected
get hard numbers on the first two additional monetary support, to rise. So far, they have been
months of the year. To fill the markets steadied. relatively stable to lower.
gap, and track the reaction in
China's financial markets, Still, the sharp declines evidence Color coding for the dashboard
Bloomberg Economics has elevated concern that the virus reflects the distance of the
collected data on coronavirus will deal an economy-wide blow reading from the average
cases and asset prices to to growth and earnings. between Jan. 20 and Feb. 4, with
construct a dashboard. Our scenario analysis points to the upper and lower thresholds
the risk of 1Q GDP growth being two standard deviations
The dashboard shows a slumping to 4.5% -- a record low. from the mean. Green indicates
pronounced sell-off across strength/less severity, while red
Chinese stocks, FX, and More positively, there’s no sign shows weakness/greater severity.
commodities when markets yet of any concern about
15
Bloomberg Economics
China's authorities are blasting enterprises’ burden for social rates in its money market
liquidity into the economy and security. For example, Suzhou, a operations. In our view, it’s likely
rolling out emergency relief city in Jiangsu Province, has to broaden the scope of the
measures to damp the indicated it will allow companies monetary stimulus this year --
coronavirus shock. Next up -- a to postpone submissions of though we don’t expect it to
boost in cyclical support to social security funds for open the floodgates, given the
cushion the slowdown. employees. risks from a buildup of debt.
Stimulating activity right now
would promote transmission of An increase in the issuance quota The PBOC will probably reduce
the virus. Once it's contained, for local government special the required reserve ratio by
though, we expect the policy bonds. In 2019, the People’s another 150-200 basis points by
emphasis to shift to boosting Congress approved a 2.15 trillion the end of the year.
demand and growth. Fiscal yuan net increase in local
policy is likely to take the lead, government special bond The PBOC is likely to reduce the
aided by monetary easing. issuance. Before the outbreak of interest rate on its one-year
the coronavirus, it was widely medium-term lending facility, the
The fiscal deficit target may be expected the quota for 2020 base for the Loan Prime Rate, to
increased to 3% of GDP this year would be as high as 3 trillion help lower funding costs.
-- the upper limit that was held yuan. We now think it could be
even during the Great Financial raised even higher -- depending The one-year LPR -- the reference
Crisis period -- from 2.8% in on the severity of the impact on rate for bank loans to companies
2019. An incremental increase in the economy from the virus. -- will probably be lowered by 40
the budget deficit would give the bps this year.
government more room to boost The People’s Bank of China is
subsidies for household already flooding the banking
purchases of durable goods. system with liquidity at lower
16
Bloomberg Economics
Brent crude is down $10 per either weak demand or increased virus-driven Chinese slowdown.
barrel so far this year. We supply. These two factors affect We replicated the analysis using
estimate about $8 of the drop is equity prices differently, Korea’s KOSPI index -- the other
due to weak demand, which for meaning we can use stock price country sensitive to Chinese
the most part is related to changes as an instrument to growth -- and the results were
concerns about the impact of the separate oil demand shocks from broadly the same.
coronavirus on activity in China. supply. Weak demand due to a
The remaining $2 decline is due slower global economy would In terms of procedure, we split
to ample supply. lower both oil and equity prices. the trading day into 15-minute
But a supply boost would reduce intervals and look at the co-
Oil rallied at the beginning of the oil prices while lifting equities -- movement between oil and
year as markets worried about lower energy costs make equities within each of these
supply disruptions from major corporates more profitable. windows. If they move in the
exporters in the Middle East. same direction, we attribute the
Now prices are falling on If both oil and equities move in oil price move to demand. If they
concerns for a demand shortfall the same direction (higher or move in opposite directions, we
from China, the world’s largest lower), that indicates a demand attribute the oil price change to
importer, as the coronavirus shock. But if they move in supply. We assume that in any 15
continues to spread across the opposite directions, that signals -minute period oil prices are
country. a supply shock. affected by demand or supply,
but not both.
No one thought the two key In this insight, we used Hong
words for oil markets in the first Kong’s Hang Seng Index for We treat non-trading hours as
six weeks of 2020 would be equities and the price of Brent one long interval and attribute
‘Soleimani’ and ‘coronavirus’. We crude for oil. Hong Kong is the the oil price move then to either
estimate the U.S. killing of the country with the highest demand or supply, depending
Iran general led to a $3 increase economic exposure to China and on the co-movement with
in oil prices at the beginning of its companies are likely to be the equities as above.
the year, but this was completely the most heavily impacted by a
wiped out a week later as both Drivers of Oil Price
countries de-escalated tensions. Source: Bloomberg Economics
17
Bloomberg Economics
At the January FOMC meeting, and reduced air travel will impact commodity price declines. Oil
Federal Reserve Chairman supply chains. China-sourced market supply shocks were the
Jerome Powell acknowledged disruption could be more main concern for the Fed in
that the coronavirus could significant than the travel 2003, generating volatility in
potentially impair global growth. impacts, though from a U.S. GDP March of that year as war
In the U.S., we expect travel and perspective, the negative effects commenced in Iraq.
tourism spending to be of an inventory drawdown could
impacted, while disrupted supply be offset by a matching decline Confidence will be key. Lower oil
chains and diminished sentiment in imports. and gasoline prices may only
could be substantial. provide a limited upward thrust,
China’s economy is far larger and in contrast to the SARS outbreak
The Fed could be pressured to more service-oriented than it was in 2003 when Iraq war-related
recalibrate policy, albeit in 2003, which could exacerbate relief caused sentiment to surge.
reluctantly ahead of the the local damage. U.S.-China
November presidential election, export targets contained in the
if the coronavirus spreads more phase-one trade deal are in
than anticipated and drives the greater jeopardy.
yield curve to invert or sparks a
severe equity market correction. The perception of negative
At present, we do not believe the demand impacts are the likely
outbreak will prompt a “material culprit for recent oil and
change” to the economic outlook
that could alter Fed policy.
18
Bloomberg Economics
The SARS pandemic of 2003 was The coronavirus impact alone is should be softened and if more
something relatively unimportant unlikely to prompt the ECB or the stimulus measures are needed.
happening in a distant land, at BOE to ease, although at the
least that's the impression left by margin it could tip the balance. Assuming the virus is contained
transcripts at the time of relatively quickly, this will
European monetary policy In an earlier scenario analysis, we concentrate the impact in the
meetings. But with China now estimated the impact of the first quarter of this year. To
more deeply enmeshed in the coronavirus epidemic on China’s assess how the economic shock
global economy, the European economy. We assumed that the might ripple out across the
Central Bank and Bank of impact would be severe, but globe, we used NiGEM, a
England can't afford to be so short-lived. We drew from structural model of the world
complacent. We gauge the evidence on the impact of the economy. This takes into account
possible impact on the European SARS virus on consumption and China’s increased economic
economy and what it means for investment activity in China. In weight and deeper integration in
policy. today’s economy a similar the global trading system since
degree of disruption might be the SARS virus of 2003. The
We consider a scenario in which consistent with growth slowing to shock transmits through a sharp
the coronavirus outbreak is 4.5% from the 5.9% we forecast reduction in Chinese imports and
contained -- this significantly before the outbreak. Chinese the chart below illustrates how
depresses activity in China in 1Q. officials are themselves the GDP impact might be felt
A global economic model shows considering whether the target across Europe’s largest
a drag on Europe’s GDP growth for economic growth this year economies.
of between 0.1 and 0.2 ppts in
the quarter.
19
Bloomberg Economics
Hong Kong's 4Q GDP data even with the Tokyo Olympics The aggressive response by
showed the economy remains providing a boost. governments to contain the
stuck in recession with continued coronavirus and the public’s fear
social unrest leaving the city Asean of exposure will stunt demand in
especially exposed to the Asean central banks may see the 1H, but a rebound of pent-up
potential shock from the threat from the coronavirus as demand will likely follow.
outbreak of the coronavirus in more insidious than the SARS
mainland China. Even if the virus outbreak 17 years ago. Back in Even so, the Bank of Thailand
is contained in Hong Kong, as we 2003, the region’s monetary already cut the policy rate this
expect, it will weaken sentiment authorities leaned on liquidity month, shedding its prior
and demand, dragging further support. This is a more flexible reluctance to deplete
on the local economy. tool to handle a temporary shock conventional policy ammunition.
We forecast the city’s 2020 GDP to growth. This time around, less Another rate cut in 1H is likely.
will decline by 0.4% year on year, than one month into the
with 1Q GDP dropping 4.7% year disruption, the policy response The Monetary Authority of
on year. Hong Kong’s GDP from the region’s more open Singapore earlier this month
contracted 1.2% in 2019 from economies already appears more hinted that further easing is in
2018 -- its worst performance aggressive. the pipeline. What’s more, the
since the global financial crisis. subsequent softening in the
Central banks often look through Singapore dollar against trading
Japan temporary shocks, especially partners has increased policy
Japan's tourism industry, like when risk of collateral damage to space.
many in the region, looks set to the inflation target appears
be clobbered by China's limited and governments have
suspension of package tour sales policy space to deploy support.
as it battles to curb the spread of
the new coronavirus. The SARS
episode in 2002-2003 provides
the closest comparison. Taking
into account structural changes Japan’s Tourist Arrivals - Three Scenarios
in the economy since then, we
think the impact on growth will
be negative, but manageable.
Chinese visitors accounted for
30% of tourist arrivals in 2019 --
up from less than 10% in 2003 --
and 40% of total spending by
foreign tourists. In our baseline
scenario -- where the hit to
inbound tourism is half that of
the SARS impact -- a drop in
Chinese visitors leads to a
decline in the total number of the
foreign tourist arrivals in 2020, Source: Bloomberg Economics
20
Bloomberg Economics
The coronavirus outbreak has Targeted measures will be key localize the economic impact to
upended China’s economy just as throughout, with the focus the extent possible.
it was regaining its footing after broadening from the current
some cooling in the trade war -- priority of ensuring adequate While virus-fighting measures are
with huge implications for macro supplies of medical and daily still intensive in Hubei, the policy
policy. We present a map to help necessities to the more affected focus has started to shift to
navigate the policy shifts ahead. parts of the country. restoring production and
normalizing economic activity in
Bloomberg Economics expect China has rolled out a blitz of the rest of the country. Premier Li
measures to address four drastic measures since mid- Keqiang signaled the shift into
priorities that will evolve over January to try to contain the virus this phase on Feb. 6. Efforts to
time -- emergency support, -- locking down large parts of restore production will
restoring production, applying Hubei province, extending the face considerable challenges in
macro stimulus, and providing Lunar New Year holiday, and the coming weeks.
targeted support for the most imposing restrictions on travel
hard-hit sectors. and social events. It’s too early to The travel restrictions that have
be definite, but new virus cases helped curb the spread of the
The intensity of support in each appear to be peaking, according virus create wide-ranging
area is likely to vary at different to daily data provided by the obstacles to production -- from
stages. The government is well into National Health Commission. purchasing raw materials to
the first stage and heading into the Importantly, the majority of the distribution, and from the
second. As it gets a grip on the cases remain in Hubei. Virus movement of people to
outbreak, the focus should shift containment will remain a priority movement of goods.
toward growth support. for now. That’s particularly so for
Hubei province in the next Virus prevention requirements
The policy timeline assumes the couple of months but also for the place additional hurdles to re-start
virus is largely contained in 1Q rest of the country as businesses production. In some areas firms
and would change if the get going again and people start need to get permission to restart
outbreak lasts longer. returning to work. Geographic facilities. Many firms face
containment is important to considerable funding issues. Policy
The policy response is likely to
be staggered. Emergency
measures have already been
rolled out. Alongside continuing
virus-fighting efforts, China is
moving to restore production
outside the virus epicenter.
Macro stimulus is likely to start
with monetary easing, with a rate
cut expected later in the month.
Fiscal stimulus -- the main means
to lift growth -- should start to
kick in with more force possibly
as early as mid-March.
21
Bloomberg Economics
work for restoring production is stability considerations. While To accommodate the extra
likely to be intensive between now cautious in easing, the central spending, the government may
and mid-March. Production of bank is likely to be proactive in widen its budget deficit target
medical and daily necessities and providing liquidity support, from 2.8% of GDP in 2019 to 3%
arranging logistics to ensure ensuring smooth functioning of for 2020 -- the widest target
delivery have been a priority over the financial system, and ever. And it could provide extra
the past few weeks. In the coming delivering targeted credit stimulus by increasing the quota
weeks efforts will increase to help measures to the most affected for special bond issuance --
other parts of the economy return areas and sectors. which would give provinces more
to normal functioning. space to boost spending on
Fiscal policy will probably do the infrastructure. Given the need to
The measures are likely to heavy lifting for growth support. maintain financial stability, the
involve unclogging The government is likely to deliver stimulus is likely to be powerful
transportation and logistics this stimulus after the virus is but not excessive. During the
channels, helping companies broadly under control and global financial crisis, the
strengthen safeguards to contain production has returned closer to government threw open the
the virus, and reducing the normal. A stimulus package may floodgates. This round will
financial burden on firms. come as early as mid-March, in a probably be more targeted.
scenario where the virus is largely Some targeted measures are
The policies are likely to be contained within the next few already in place. Many more are
flexible -- calibrated based on weeks. This would be ahead of the likely to follow, tailored to
the extent an area or sector is National People’s Congress, which complement broader policy
affected and the risk of the virus is usually held each year in early initiatives and address changing
spreading. March. needs as circumstances evolve.
Monetary policy will probably take There is a risk of the NPC being The initial targeted groups, in
the early lead in macro stimulus. delayed. Even so, that wouldn’t production and financial support
We expect the one-year Loan necessarily put the brakes on are medical related -- reflecting
Prime Rate -- the reference for stimulus. When battling the the priority of containing the
bank lending to companies -- to fall global financial crisis, China virus and supporting medical
40 basis points over the course of unveiled its 4 trillion yuan requirements. Over time, as the
the year -- more than the 20 bps of stimulus in November 2008 -- policy focus shifts toward growth
reductions we expected before the less than two months after support, the targeted measures
virus struck. The first cut will likely Lehman Brothers collapsed -- are likely to expand in scope.
come on Feb. 20. We expect a 10- and it did not tie the Small private firms -- which were
15 bp move -- deeper than a 5 bp announcement with the NPC. under stress before the virus
increment for the last two rate cuts. outbreak -- are likely to be one
We expect the fiscal package to key group to support. Measures
What’s fairly clear -- the PBOC consist of increased may come in the form of tax relief
isn’t set to slash rates infrastructure spending, tax and fee reductions, and
aggressively. It has signaled as relief, and other forms of support permission to delay tax and
much. Growth needs to be for the most affected regions, social security payments for the
supported. But the central bank sectors and groups. most affected regions, industries
hasn’t taken its eye off financial and groups.
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