We expect year-on-year real GDP growth in 1Q to be negative. All major sectors are taking a big hit and all high-frequency data are showing negative yoy growth. The impact is much more severe than SARS in 2003 and may be comparable to the recession in 2008-09.
While the COVID-19 outbreak is drawing all the attention in the market, the phase-1 trade deal between China and the U.S. officially went into effect on 14 February. China was on track to fulfill its commitments, mostly related to regulatory reforms. But it is impossible for Beijing to deliver the total purchase volume for 2020 thanks to the U.S. travel ban as well as shrinking Chinese demand. We believe the two sides will make adjustments to the deal and agree to a smaller number for 2020 and stretch it out into 2022.
Chinese markets have seen remarkably different reactions to the COVID-19 outbreak over the past few weeks. The A-share market has fully recovered from the 12% sell-off in late January and early February. It has now rebounded back to where it was before the outbreak with the CSI 300 index up 1% year-to-date.
China’s current account surplus rebounded to $178bn in 2019 from $49bn in 2018, as both goods trade balance and service trade balance improved from last year. As a share of GDP, it rose to 1.2% from 0.4% in 2018. Most notably, outbound tourism spending fell to $255bn from $277bn. The surplus could rise further because outbound tourism spending can fall a lot more this year, and China’s import will slow down much more than export thanks to the outbreak.
Beijing decided to postpone the annual meeting of the National People’s Congress (NPC) this afternoon due to the outbreak. We hold the view that it is likely to be held in late March with about two weeks delay, and there is a small chance that it will be delayed into April (See: Expect More Delays to Restoring Business). The healthcare system would certainly be a top priority for discussion at this year’s NPC annual meeting.
