Coronavirus damage to China's economy clear from early indicators

BEIJING (BLOOMBERG) – A range of early indicators of China’s economy in February confirm that the coronavirus outbreak has crippled production and consumption, as factories remain below capacity and transport is curtailed.

Five of the eight indicators tracked by Bloomberg dropped in February from January, with two indicators of business confidence plunging to the lowest on record.

The improvement in the headline South Korea exports in first 20 days of the month hides a drop in shipments to China and was flattered by the distortions from the Lunar New Year. Expectations of fresh stimulus have also kept financial markets more buoyant than real activity would suggest.

While businesses are restarting and the official data shows the rise in infections slowing, the virus is not yet overcome, and companies and various levels of governments have to weigh the desire to return to normality quickly with the need to stop the disease. The economy is forecast to grow the slowest since 1990 according to the median of recent economists’ reports, with Goldman Sachs Group estimating it will expand only 2.5 per cent in this quarter, before rebounding later.

A slowdown of that magnitude could lead to higher unemployment, bad loans, and bankruptcies. Already car sales are plummeting and property developers are being squeezed as people hold back on spending as they wait to see what will happen with the disease, and when they can go back to work.

The reaction to the outbreak will be visible in the first official statistics for February – the Purchasing Manager Indexes due on Feb 29. The indicator for manufacturing is forecast to drop to the lowest since the global financial crisis, although five economists are forecasting it to be even worse than that.

“The earliest business surveys have already shown record declines of demand and output. The overall momentum reversed strength in previous months to weakness in February, as the virus hit industrial production, supply chains and consumption,” according to Bloomberg Economics’ Qian Wan. “We expect activity to start to recover from March. Efforts to contain the virus continue, but the government is clearly shifting” toward pro-growth policies to and help companies get back to work after the extended Lunar New Year break, she said.

A monthly survey on the health of China’s small and medium-sized businesses plummeted to a record-low in February, highlighting the negative economic impact of the outbreak. A sub-index from the survey by Standard Chartered evaluating “current performance” dropped even more sharply, while the reading for the outlook was better than the headline number, signaling some hope for recovery once the outbreak is contained.

About two-thirds of small- and medium-sized companies only have enough cash on hand to survive for up to three months, according to the report from Shen Lan and Ding Shuang at Standard Chartered. Earnings in the first quarter will fall 43 per cent, according to their survey, with the biggest drops in wholesale and retail industries.

One bright spot in the indicators Bloomberg tracks has been Chinese stocks, which took just weeks to recover from a record selloff earlier this month triggered by the virus. But that almost 10 per cent rally since Feb 3 is built on little more than liquidity, surging partly on hopes that monetary easing and fiscal support measures would help companies weather economic headwinds. Leverage on Chinese exchanges rose above 1 trillion yuan (S$198.8 billion), the highest since early 2016.

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