CORONAVIRUS OUTBREAK TO CREATE SHORT-TERM DISRUPTION
FURTHER INTEREST RATE CUTS LIKELY
Economy growth slowed to 6.1% in 2019 owing to weaker external demand, trade conflict with the U.S., and domestic and structural transformation.
While the signing of the Phase-One trade agreement with the U.S. provided a short-term boost to business sentiment and global trade, the coronavirus outbreak poses a new downside risk to economic growth.
Although the impact of the virus will highly depend on its duration and scale, China’s Q1 2020 GDP growth could dip to below 5%. Authorities are expected to roll out a range of fiscal stimuli including tax cuts and loan interest subsidies for seriously affected industries such as transportation, tourism, hotel and F&B.
Together with more supportive monetary policies, these measures should help stabilise the economy and drive a recovery in H2 2020 once the outbreak is brought under control. CBRE expects China’s GDP to grow by 5.5% for full-year 2020.
RATE CUTS BECOME MORE LIKELY
On January 6, 2020, the People’s Bank of China (PBoC) implemented 50 bps cut to the Reserve Requirement Ratio (RRR). Following the outbreak of the coronavirus, the China Banking and Insurance Regulatory Commission (CBIRC) issued a circular requiring banks to extend credit support to enterprises and individuals affected by the epidemic including allowing them to delay loan repayments and lower lending rates, The PBoC will also provide RMB 300 billion of special relending funds to major national banks and local banks in key provinces such as Hubei.
Further RRR and interest rate cuts are likely in Q1 2020 as the government seeks to mitigate downside economic risks caused by the coronavirus outbreak. The marketisation of lending rate formation and implementation of the Loan Prime Rate (LPR) in 2019 will see a more flexible approach to credit due to economic conditions.
CBRE does not expect significant credit loosening in the real estate sector, with the government’s guiding principle of ‘Housing is for living, not for speculation’ reiterated in December’s Central Economic Work Conference (CEWC).
STIMULUS EXPECTED TO STABILISE GROWTH
VIRUS HITS CONSUMPTION, BUT E-COMMERCE CUSHIONS IMPACT
Consumption was impacted heavily in the short term during the SARS outbreak in 2020. Y-o-y growth in national retail sales and hotel & catering slowed by 2.4 ppts and 3.6 ppts, respectively, in Q2 2003.
Entertainment, F&B and fashion retailers will be most impacted in Q1 2020 as households curtail activities outside the home and cut back on discretionary spending. Starbucks temporarily shuttered 2,000 outlets across China – more than half its total – from January 29 while IKEA announced the closure of all its China stores on January 30. Many shopping malls have shortened their business hours and provided temporary rental rebates to retailers.
The impact of this latest outbreak could be cushioned to some degree by China’s robust e-commerce sector, which accounted for approximately 21% of total retail sales in 2019. Provided the outbreak can be contained in the coming months, CBRE expects consumption growth to rebound quickly in H2 2020.
POSSIBLE STIMULUS FOR INFRASTRUCTURE AND ADVANCED MANUFACTURING
The government is expected to leverage fiscal stimuli such as local government bonds to boost infrastructure investment and stabilise economic growth. In addition to traditional areas such as railways and roads, investment is likely to be directed into emerging fields such as 5G, smart cities and cold chain logistics. Healthcare facilities will also be a focus.
The government is likely to extend continued support to companies engaged in advanced manufacturing such as pharmaceuticals, aviation and telecommunication, as part of a long-term restructuring initiative and to provide a short-term economic boost. In 2019, fixed asset investment in advanced manufacturing grew by 17.3% y-o-y, eclipsing the 3.1% y-o-y recorded for the whole manufacturing sector.
FOREIGN TRADE HEADWINDS PERSIST, BUT SERVICE TRADE SET TO RISE IN THE LONG RUN
Ongoing trade conflict with the U.S. saw foreign trade growth decelerate to 3.4% in 2019, down from 9.7% in 2018. While the Phase-One trade deal provided short-term relief, the coronavirus outbreak has added a new layer of uncertainty onto trading activity.
The accelerated opening-up of China’s financial sector, and the development of the education and healthcare industries, should attract new FDI in the coming years and reshape the composition of China’s trade industry in the long run.