China’s historic GDP decline signals demand for more stimulus—but will Beijing act?

April 17, 2020, 8:15 AM UTC

China’s gross domestic product contracted 6.8% in the first quarter of 2020, the National Bureau of Statistics (NBS) said Friday, revealing the extent to which the economy has been battered by the COVID-19 virus. The negative growth marks China’s first annual quarterly decline since at least 1992, when records began. With declines likely to continue into the second quarter, eyes are on Beijing to see what fresh stimulus measures state leaders dish out.

Round one

China’s economy was put on hold for much of two months this year, beginning with the weeklong national holiday at the end of January being extended by another week in order to help contain the spread of the deadly coronavirus. Many factories remained closed or severely short-staffed throughout March as swaths of the population were ordered to stay inside.

With the outlook obviously bleak, China began deploying stimulus measures in mid-February to get the economy back on track. China’s central bank, the People’s Bank of China, slashed reverse repo rates and reserve ratio requirements to their lowest in years, injecting hundreds of billions of dollars into the market.

Other banks were instructed to be lenient on loan defaults, too, while local governments issued $144 billon in special bonds to raise funds for infrastructure spending. Factories were offered tax breaks and subsidies to return to work, and some local governments handed out coupons for citizens to spend on consumer goods.

Round two

The steep retraction seen in the first two months of the year generally slowed in March, according to the NBS, but the relative gains fall far short of what stimulus measures should have achieved. According to Bo Zhuang, chief China economist at financial advisory TS Lombard, the slowing decline is just a sign of the economy restarting naturally.

“If you look at infrastructure investment, it hasn’t really picked up very strongly. Only utilities have recovered, but other infrastructure spending, such as railway development, is still down nearly 20%, which means they have resumed existing projects but have yet to start new projects,” Zhuang says.

Alicia Garcia Herrero, senior research fellow at economic think tank Bruegel, anticipates more regional governments will issue consumer vouchers and that China’s shadow banking system—credit lines kept off the books of official banks—will be deployed to increase investment in infrastructure as a second round of stimulus.

Beijing is considering further stimulus, such as raising the deficit-to-GDP ratio and issuing further special sovereign bonds too. However, the government remains reticent to enact major fiscal measures.

Wait and see

“The government doesn’t know what to do because the National People’s Congress has not been held,” Zhuang says, referring to the annual two-week meeting of China’s state legislature, where party leaders set policy directions for the coming year.

The NPC was supposed to convene in March but has been postponed indefinitely. Zhuang says Beijing is waiting to see how the U.S. and the EU react to the pandemic before convening the NPC and announcing its own policy moves.

The U.S. and the EU account for 34% of China’s export purchases, so China’s recovery from COVID-19 will be heavily affected by the recovery of these two regions. Exports in the first quarter plummeted 11.4% as demand dried up overseas. With much of the EU and U.S. still under lockdown, the decline is likely to extend into the second quarter.

There’s little Beijing can do to counter that.

For the year ahead, Beijing will primarily be concerned about unemployment rates, says Oxford Economics lead economist Tommy Wu. Official data for March showed urban unemployment at 5.9% and said joblessness was “generally stable” in the first quarter—despite some 460,000 companies going bust already this year.

Wu called the unemployment figure remarkable and questioned whether the data—which is based on a government survey and has hovered around 4% to 5% for years—is representative of the labor force. He expects the government will hand out more wage subsidies to employers in order to keep jobs open.

“I expect the government’s approach now will be to keep employment up, keep the economy going, and look forward to next year,” Wu says.

More coronavirus coverage from Fortune:

22 million lost their jobs in the past month—real unemployment rate likely near 18%
—How Fortune 500 companies are utilizing their resources and expertise during the pandemic
—Inside the surreal “Mask Economy”: Price-gouging, bidding wars, and armed guards
—The IRS just launched “Get My Payment” portal for tracking your stimulus check status
—How every sector of the S&P 500 has been impacted by the coronavirus selloff
—If you’ve been a little busy lately, here’s what’s going on with the 2020 election
—Military experts: We need to fight coronavirus like we fight insurgents on the battlefield
—PODCAST: COVID-19 might have upended the concept of the best companies of the year
—VIDEO: 401(k) withdrawal penalties waived for anyone hurt by COVID-19

Subscribe to Outbreak, a daily newsletter roundup of stories on the coronavirus pandemic and its impact on global business. It’s free to get it in your inbox.