The outbreak of 2019-nCoV has added to concerns over economic activities in China. Work suspension, travel restrictions and confined movement of people and goods are posing downward pressure on 1Q economic performance and corporate earnings. Despite near term worries, we hold the belief that 1) the outbreak of 2019-nCoV will eventually be under control. Together as one we will conquer; 2) the growth story and drivers remain largely intact in 2020 and onward. The crisis is likely to trigger beneficial reforms; 3) more steadfast policy support is coming along to calm frayed nerves and provide relief for the entire economy and in particular affected industries and sectors.
- Economic concerns are real, but too early to reach quantitative conclusion. Downward pressure primarily comes from work suspension and reduced consumption demand. At least 22 provinces (excluding Hubei) has announced provincial-level plan to extend holidays until 10 Feb 2020, i.e. 10 extra days on top of official CNY holiday. People are suggested to restrict travel and movement, thus reduced demand for transportation, dining-out and etc. According to some rough calculations, we expect the virus outbreak may drag 1Q GDP by 0.5 to 0.8ppt under the assumption that an inflection point will show up in mid-Feb when the number of confirmed cases begin to decline. Consumption is likely to suffer the most with bleak retail sales figures, followed by investment and industrial production. Although the future trajectory of the virus infection is not certain, we expect impact on the whole year GDP growth would be milder because 1) the rebound of economic activities after the virus is under safe control could turn out to be astonishing; 2) Jan-Feb is usually the weak season during the whole year due to CNY effect.
- Growth story and drivers remain intact. Despite near term woes, the outbreak of 2019-nCoV will eventually be under control. This temporary shock does not derail China’s macro story restocking and weak stabilization in 2020. Nor does it shake China’s commitment to a robust economy and fostering quality growth. Moreover, every crisis brings lessons. The incident may trigger an overhaul and introspection of China’s public health system and local authorities’ duties per se. All these will provide solid backbones for future growth of China.
- Steadfast policy support. We think the outbreak of 2019-nCoV will firm determination of policy easing, via 1) fiscal, 2) monetary, and 3) industry policies. Prior to the virus outbreak, policy easing faced many restrictions ranging from inflation, leverage, to household affordability. But the crisis is bringing authorities closer together. In order to counteract negative impact from the external virus outbreak, synchronized and coordinated efforts are called on from the PBoC, MoF, together with CBIRC, CSRC, SAFE and all other related bodies of authorities. 1) Regarding monetary policies, we continue to expect easing in both quantity (via OMO, MLF, etc) and price (LPR cut), added by extend loans and reduced interest rates. 2) On the fiscal front, we expect VAT cut, corporate tax cut and reduction in social security fees for targeted industries. 3) We also expect industry policies to step up urging expense reductions and alleviating regulatory burdens, thus providing friendly environment for small businesses to grow.
