China has become the world’s pioneer on coronavirus response—a mantle assumed out of necessity. The first to encounter the COVID-19 virus in its industrial hub of Wuhan, China enacted mass lockdowns and managed to contain the outbreak. As the virus spreads across the globe, governments elsewhere are mimicking the tactic, forcing large swaths of the world’s population into inactivity, isolation, and even quarantine. But mandatory social distancing comes with a price, and Beijing’s response to the economic fallout is so far less instructional.
China’s economy endured a one-two punch under lockdown. With workers and consumers told to stay home, both consumption and production plummeted. The tradeoff was a peak and steady drop-off of coronavirus cases; the vast majority of the 83,000 people infected have recovered, according to China’s count. But when data quantifying the economic fallout started rolling in, it was undeniably bleak.
“This is hands-down the absolute worst result we’ve ever recorded,” said Shehzad Qazi, managing director at China Beige Book (CBB). The consultancy surveys over 3,300 Chinese companies to gauge the strength of the world’s second-largest economy, and in the first three months of this year, all of its headline metrics—from revenue to profits—sank into contraction territory, a result never seen in its decade of tracking.
Beijing gave a back-to-work order in mid-February, and in March, the manufacturing purchasing managers index showed a mild return to expansion after hitting a record low the previous month.
While China was quick to encourage a resumption of work, it was slow to formulate an official economic answer to the shutdown. The government began subsidizing factories by offering tax breaks and cash payouts for those that returned to business. It also called for increased spending on infrastructure, releasing $90 billion in special loans to fund projects but issuing few directives for what should be built. Banks have been instructed to be lenient with loan defaults too.
By comparison, the U.S., the coronavirus’s new hotspot, earmarked $2 trillion in March to help businesses, hospitals, and workers counter the economic ails of COVID-19, while the Fed slashed interest rates to nearly zero. The U.S. is expected to inject more cash into the economy as its containment measures fail to stall the virus’s spread.
As Cui Ernan, an analyst at financial services firm Gavekal puts it, China is winning on containment but losing with its economic response.
Beijing has pledged to be more decisive. The central government said it would issue special sovereign debt and allow local governments to sell more infrastructure bonds. Its central bank has injected hundreds of billions of dollars into the economy since the outbreak began. Meanwhile, the Beijing-backed Asian Infrastructure Investment Bank issued its first emergency relief loan, lending China $353 million in April.
Consumers are getting aid too, although many may feel shortchanged by the handouts. In Nanjing—the capital of eastern Jiangsu province—the local government distributed $45 million in vouchers to encourage the city’s 8.5 million residents to spend on services, such as restaurants and tourism. By comparison, the U.S. is giving most taxpaying Americans $1,200.
Liu Qiao, dean of Peking University’s Guanghua School of Management, says some low-income and hard-hit Chinese citizens should receive cash payments too, so they can spend money on what they need. Liu says a tax cut for low-income groups would better spur consumption as well. However, observers don’t foresee Beijing handing out hard currency.
President Xi Jinping’s recent focus on de-leveraging has bound the hands of policymakers, so the measures Beijing implements in response to the coronavirus aren’t expected to match the $572 billion in stimulus it deployed in the global financial crisis.
However, the current measures won’t be nearly enough to ensure China meets its target of doubling real GDP over 2010 levels—from $7.5 trillion to $15 trillion—by the end of 2020. To hit its target, China needs GDP growth this year of at least 5.6%. Tommy Wu, lead economist at Oxford Economics, predicted in March that China was on track for 1% growth.
Bo Zhuang, chief China economist at research firm TS Lombard, blames Beijing’s measured stimulus on “policy lag” rather than a reluctance to act. The central government didn’t foresee how the coronavirus would paralyze markets outside China, Bo says—markets on which China’s exporters depend.
TS Lombard estimates the coronavirus outbreak will knock U.S. GDP growth into recession this year, contracting 3.2% over 2019 with steep retreats in the second and third quarters. The eurozone is forecast to contract 4.5%.
Together, the U.S. and the EU consume 34% of China’s exports but, with the regions under lockdown, demand crashed during the first quarter. Gavekal estimates Chinese exports will decline between 20% and 45% in the second quarter, dragging China’s economy toward a second wave of contraction—this time driven by forces beyond its borders.
A version of this article appears in the May 2020 issue of Fortune with the headline “China’s next COVID-19 crisis.”
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