Two Risks Ahead For China’s Economy

Between Washington devising new ways to punish them for the spread of the coronavirus and the destruction of economies and livelihoods, to Wuhan’s all-important testing to see how far they’ve come in combating the virus, the market has a lot on the stir fry pot.To get more economy news today, you can visit shine news official website.

Judging by all the market knows now, the highlight everyone is waiting for comes on Friday. That’s when the Communist Party’s legislators will meet for its delayed National People’s Congress meeting to discuss a coronavirus relief package.

The first one is that Chinese economists under-estimate the size of the shock and recommend an underwhelming relief package. More experienced China hands are likely to be pricing in a much bigger stimulus.Sebastien Galy, macro strategist for Nordea Asset Management, is worried about Beijing missing the mark. That’s a sell sign heading into the weekend.

The second risk is that nationalist forces — in retaliation for what may be days and days of China bashing here in the U.S. — decide to push Xi Jinping to drop the phase one deal even as Liu He and Robert Lighthizer seemed to have had a good call two weeks ago.Trump said he was not re-negotiating the deal, a deal which forces China to import vast amounts of commodities it is unlikely to need at this time.

“The odds are that neither party will go very far given the feedback loop on their economies and the stock market,” says Galy, giving his base case. “We remain positive on a China-led rebound spreading into emerging markets.”

That positive stems from a stimulus announcement on Friday.China’s major economic indicators showed modest signs of recovery in April from record lows earlier in the year, official data showed last week.

Fixed-asset investment declined at a much more moderate pace last month and industrial output bounced back for the first time this year, according to survey data from the National Bureau of Statistics.

Retail sales continued to decline on a year-on-year basis, but the pace of the drop was less than half that of March. Moreover, as Wuhan continues to test for the coronavirus en masse in that city of 11 million, assume there is no major breakout of the kind that warrants new lockdown orders. If there are no new lockdown orders in Wuhan post-test results, Chinese fears of contracting the virus will subside even more. Restaurants may come back to life again as summer approaches.

What it looks like now is that the public health crisis is largely under control in the main economic hubs of China — in Guangzhou, in Bejing, in Shanghai even as the pesky virus lingers on.Economic activity is recovering and domestic supply and demand are improving.

Investors are bullish on more supportive measures coming out of Beijing on Friday. If they are pleasantly surprised, China will rally into the weekend. Markets will be looking to read the tea leaves over the next few days, and hoping that China ignores the rhetoric from Washington, assuming it to be campaign chatter.Prudent investors should expect Galy’s “missed opportunity” to play out, just in case, and be pleasantly surprised if it does not.

The reason? Well for years, Xi Jinping has been less interested in blockbuster stimulus pushes, fearing high debt. China’s debt is high compared to its development levels. While high debt has made economies like Japan stagnate, China is a poor country by comparison and cannot afford a debt-induced slowdown for long. Such lackluster growth would threaten the Communist Party’s hold on society.

Moreover, the last time China spent big on stimulus was in the Great Financial Crisis (GFC) of 2008-09. Beijing unleashed some 4 trillion yuan into the market. A Chinese bazooka. But a lot of that money was misused by provincial leaders, not going to the productive economy in any meaningful way, and Xi seems to have been turned off by that. He’s been averse to similar stimulus plans ever since the GFC.