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Coronavirus: A Human Crisis That Should Trigger Chinese Policy Put
While the full impact of the virus remains unclear, it will likely force China to maintain a degree of policy support into the second half of 2020 and possibly beyond.
The novel coronavirus (2019-nCoV) is still in the early phase of accelerating infection rates and, sadly, increasing death rates. Our thoughts are with all those affected by the virus. While much is still unknown, authorities have responded within China, across the globe and in international cooperation. Thus, we have faith that ultimately the outbreak will be contained.
As global investors, we apply a macroeconomic lens to our assessment. Although the nCoV outbreak will almost certainly knock China’s quarterly economic output, the medium- and long-term view could be much less negative.
One risk going into 2020 was the possibility that the Chinese government would reverse course and cut, if not eliminate, its stimulus programs. It is now highly unlikely that we will see a sudden stop to the monetary, fiscal and regulatory stimulus that has helped drive the Chinese recovery since mid-2019.
The importance of public health in China has materially raised the bar for the central, provincial and local governments to effectively manage the acute effects of the epidemic. While laws technically hold the local government accountable, President Xi and the central government exercise centralised power and we expect them to mobilise government resources to limit the economic fallout.
Figure 1: Chinese Fiscal and Monetary Policy Settings Have Been One Directional
Source: State Street Global Advisors Global Macro Policy, Macrobond, IMF, as of 31 January 2020.
In terms of economic impact, nCoV will likely cause Chinese economic growth to drop significantly from 6% during Q1 2020, requiring the Chinese authorities to revisit their plans for ending their stimulus actions. In 2019, fiscal easing was roughly equal to 2% of GDP, with another 0.5% slated for 2020. Along with the Chinese central bank’s monetary policy actions — lowering lending rates and reserve requirements (down 2%) for banks — this combined fiscal-monetary stimulus has helped stabilise Chinese growth and the global recovery.
The phase one US-China trade deal was going to be the trigger to cut back on stimulus, but nCoV makes that prospect unlikely. Instead, we can expect policy support continuing into the second half of 2020 and possibly beyond. Together with the cyclical recovery post epidemic, this means China could well be a growth driver over the whole year, compensating for its role as a source of slowdown in Q1 2020 (assuming the virus effect reverses within two to three months). In the long term, as Figure 1 indicates, this episode reaffirms the “policy put” that has guided Chinese actions for the past decade.
Virus-induced asset price moves are likely to correct once the growth rate of infections slows down. Thereafter, Chinese policy support should provide a tailwind for global equities as well as the renminbi, with positive knock-on effects for other emerging market currencies.
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