China to boost stimulus measures as virus hammers economy

China is expected to unveil efforts to cushion the economic blow from coronavirus, with the central bank set to keep liquidity ample and the government likely to step up spending

China is expected to unveil efforts to cushion the economic blow from coronavirus, with the central bank set to keep liquidity ample and the government likely to step up spending.

Authorities will need to break their fiscal rule of a 3% deficit relative to GDP to “slow the downward spiral of economic activities”, according to Li-Gang Liu at Citigroup Inc. Measures such as cutting interest rates and the proportion of deposits banks must set aside as reserves are possible, said Larry Hu, head of China economics at Macquarie Securities Ltd in Hong Kong.

As the death toll rises and authorities tighten travel restrictions and lock down cities to contain the epidemic, the blow to spending and production is becoming clearer, with policy moves unlikely to avoid at least a short-term wallop.

Starbucks and Uniqlo are among the retail outlets closing down across the country, and manufacturers including Toyota Motor Corp have halted production at least for a time.

“Beijing is unlikely to sit on its hands, ” said Hu. “But liquidity-easing measures could only do so much to boost growth.”

The hit could exceed that seen during the SARS outbreak of 2003, according to Nomura Holdings Inc. Gross domestic product growth could “materially drop” this quarter from the 6% pace at the end of 2019, maybe even more than the 2 percentage point deceleration seen in the second quarter of 2003, Nomura economists led by Lu Ting wrote in a report to clients. Policy makers will provide liquidity and credit support, especially to business owners severely affected, they said.

“RRR cuts, rate cuts, various lending facilities and open market operations all are possible options, ” the Nomura economists wrote.

“However, it seems unlikely that these measures would turn the economy around, as the virus outbreak may further weaken domestic demand and thus render the upcoming policy easing less effective.”JPMorgan Chase & Co economists led by Zhu Haibin revised their growth forecast for 2020 to factor in the “large negative shock” in the first quarter, mainly to retail sales. They lowered the year-on-year prediction for the first quarter to 5.6% from a previous estimate of 6% and the 2020 forecast to 5.8% from 5.93% earlier.

Like most economists, the JPMorgan team noted that much depends on China’s ability to contain the spread of the disease.

“A more benign scenario is that the virus outbreak will successfully be contained in the next few weeks after the ‘Big Bang’ control measures, ” Zhu wrote.

Some of China’s largest banks have already said they will reduce interest rates for firms affected by the novel coronavirus. — Bloomberg

Source: Bloomberg 

Posted on : 31 January 2020
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Last Updated : Tuesday 25th February 2020