China suffers historic contraction as virus paralyzes economy

BEIJING, China – China’s economy shrank for the first time in decades last quarter as the coronavirus paralyzed the country, in a historic blow to the Communist Party’s pledge of continued prosperity in return for unquestioned political power.

Gross domestic product (GDP) in the world’s second largest economy fell 6.8% in January-March from a year earlier, according to government figures – a stunning turnabout for a generation of Chinese consumers raised on supercharged growth rates.

The National Bureau of Statistics (NBS) data marked the first contraction since the government began logging quarterly performance in the early 1990s, and a sharp reversal from the 6% expansion during the 4th quarter of 2019.

The figure beat an 8.2% decline forecast by an Agence France-Presse (AFP) poll of analysts before the news was released.

But economists have long harbored suspicions that official Chinese economic data is massaged for political reasons.

“The actual contraction in the 1st quarter, especially in March, could be worse than headline numbers suggest,” Nomura analysts said Friday, April 17.

Experts warn that growth is unlikely to rebound soon, with depressed demand for Chinese goods in overseas markets that are also grappling with the pandemic.

Fears of a second outbreak are also dragging on efforts to fully fire up China’s economy, a major engine of global growth. 

“We are now facing rising pressure in the prevention of imported epidemic infections, as well as new difficulties and challenges for resuming work and production,” NBS spokesman Mao Shengyong told a press conference.

Grim picture

Full-year GDP growth expectations have fallen to 1.7%, according to AFP’s poll, in what would be the worst annual performance since 1976.

But the International Monetary Fund, which has pegged China’s 2020 full-year expansion even lower at 1.2%, is predicting a strong rebound to 9.2% growth in 2021.

Mao said only that if the pandemic can be brought under control, “the second half of the year should be better than the first.”

The economic figures are deeply significant in China due to the tacit political compact between the Communist Party and the country’s 1.4 billion people.

More than 4 decades since Beijing abandoned radical Maoism in favor of authoritarian capitalism – achieving spectacular growth – Chinese citizens have largely acquiesced to the party’s monopoly on power, in exchange for continued prosperity.

China analyst Jean-Pierre Cabestan of Hong Kong Baptist University said the current situation puts a nail in the coffin of the party’s stated goal of doubling GDP from 2010-2020.

But he saw no immediate peril for the all-powerful regime, especially if it can maintain stability and steer the country through the health crisis while other countries struggle.

“I think that’s a very important set of achievements which the party is going to promote in order to remain legitimate,” Cabestan said.

Policy support

Despite travel restrictions being eased and businesses stirring again, Friday’s data showed a 1.1% decline in Chinese industrial output for March as factory shutdowns lingered, and retail sales also plummeted 15.8% as consumers played it safe at home.

More pain is expected, according to Capital Economics chief Asia economist Mark Williams.

“Public records suggest that at least half a million firms were dissolved in the 1st quarter and more are likely to close shop,” he wrote in a report this week.

Williams added that surveys pointed to more layoffs in March, unemployment will likely remain higher in coming months, and depressed overseas demand could reduce Chinese exports – which account for 15% of national GDP – by as much as half.

Shrinking export demand may have shaved 1.8 percentage points off real GDP growth in the 1st quarter, Nomura’s chief China economist Lu Ting had said earlier.

Nomura expects a “large stimulus package” consisting of financial relief targeted at businesses, banks, and households. Beijing already has ramped up stimulus for smaller enterprises and low-income individuals.

Wuhan, the central Chinese city where the coronavirus outbreak was first detected, announced on Friday it would begin handing out vouchers worth 500 million yuan ($70 million) to boost consumption in the city of 11 million people, state media reported. – Rappler.com