China Mulls an Emergency Rescue Package for its Tanking Economy as the Financial Hit From the Coronavirus Outbreak Packs a Punch

Feb 4, 2020
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China is planning to unveil sweeping measures to bolster its economy that has been reeling under the strain of the coronavirus outbreak.

The epidemic has killed at least 427 people and infected over 20,000 globally with the infection having popped up in more than 25 countries and territories.

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The following infographic illustrates the unfortunate human toll of the coronavirus outbreak:

According to the exclusive reporting by Reuters, China’s central bank – the Peoples Bank of China or PBOC – is likely to reduce its key lending rate, known as the loan prime rate, on the 20th of February and cut the Reserve Requirement Ratios (RRR) for banks in the coming weeks in order to spur debt-fueled growth. Bear in mind that RRR benchmarks mandate the amount of reserves that commercial banks must hold. Consequently, their lowering enhances the ability of the banks to provide additional loans.

As a refresher, the PBOC has already pumped hundreds of billions of dollars in China’s financial system in order to stave off a precipitous decline in growth. As investors grew increasingly cautious and equity markets throughout the world panicked, the PBOC injected 1.7 trillion yuan ($242.74 billion) into China’s financial system through open market operations in the past two days alone.

Additionally, in order to curb job losses, China’s policymakers are also expected to introduce targeted relief measures – in the form of additional spending, tax reliefs and subsidies – for the more vulnerable sectors such as retail, catering, logistics, transportation and tourism. These measures will, however, increase China’s 2020 annual budget deficit level to 3 percent from 2.8 percent in 2019.

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It should be noted that China’s economy was flagging even before the onset of the coronavirus outbreak as the Asian giant was pummeled by the 18-month long U.S. – China trade war. As an illustration, China’s economy grew by 6 percent in the fourth quarter of 2019 and by 6.1 percent for the whole year, registering the weakest growth trajectory in 29 years. Consequently, in order to alleviate some of the downward pressures on the economy, the PBOC has already cut the crucial RRR benchmark eight times since early 2018, with the latest reduction taking effect on the 6th of January 2020.

Interestingly, 2020 is a crucial year for policymakers in Beijing as they seek to fulfill the stated goal of doubling GDP and incomes in the decade to 2020, thereby, turning China into a “moderately prosperous” nation. The coronavirus epidemic has now jeopardized these lofty targets.

Impact of the epidemic on commercial activities within China

In order to curb the spread of this disease, the lunar new year holidays have been extended by as much as 10 days in key Chinese regions, including the vital Shandong province and the cities of Suzhou and Shanghai. Moreover, much of China’s transportation network remains suspended while over 40 international airlines have cancelled flights to and from the embattled country.

It is hardly surprising, therefore, that many economists have been actively reducing their growth projections for the country. As an illustration, Reuters has quoted Louis Kujis – an economist at Oxford – as having curtailed his forecast for China’s GDP growth to 5.4 percent in 2020. Moreover, UBS economist Tao Wang has predicted that the country’s first-quarter growth could dip to as low as 3.8 percent, with the full-year GDP growth projection at 5.4 percent.

Of course, this marked commercial slowdown is having material impact on international and local businesses within China. Following are some of the major developments that have emerged in recent days as companies try to grapple with the coronavirus epidemic:

  • Apple (NASDAQ:AAPL) has given a less precise revenue outlook range for the March quarter due to the prevailing level of uncertainty. Foxconn, a major Apple supplier, has halted almost all its production in China.
  • Apple, Google (NASDAQ:GOOGL) and Deere (NYSE:DE) have temporarily closed their offices in the country
  • Baidu (NASDAQ:BIDU) has postponed the announcement of its fourth quarter earnings
  • Pandora (CPH:PNDORA) has conceded that the virus has led to an “unprecedented” decline in consumer traffic in China and Hong Kong and that it was unable to estimate impact immediately
  • Samsung Electronics (KRX:005930) extended a holiday closure for some factories as per Chinese government guidance while Samsung SDI (KRX:006400) has warned of downside risks to its March-quarter earnings
  • Sony (TYO:6758) has noted that its raised annual profit outlook could be subject to a revision due to the ongoing epidemic
  • Tesla (NASDAQ:TSLA) has warned that the closure of its Shanghai Gigafactory may hurt the first quarter profitability metrics.
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