When capitalism seemed to be collapsing across the western world in 2009, demand from China, for everything from iron ore to designer handbags, helped lift the global economy out of the darkest days of the financial crisis.
The Chinese economy, fuelled by a $586bn stimulus package, grew by 9.4 per cent that year and broke 10 per cent in 2010, earning credit for leading the global recovery as the US and Europe struggled. That effort consisted mostly of bank lending and kick-started economic activity, as Chinese groups bought up raw materials and goods around the world.
Some economists think China will launch a stimulus programme that will spur a new wave of demand in the countries devastated by coronavirus and tipped the global economy into a recession.
This time round, however, the People’s Bank of China has taken a more measured approach so far, even as the US Federal Reserve has pumped trillions of dollars into the financial system and central banks around the world that have lowered interest rates.
The PBoC has lowered lending rates slightly and this week unleashed about Rmb550bn in new lending capacity at banks.
“There has been a lot of enthusiasm regarding People’s Bank of China interventions here in Europe, especially given that the ECB’s manoeuvre margin is so limited,” said Ipek Ozkardeskaya, a senior analyst at Swissquote Bank.
But the world’s second largest economy is in the midst of its sharpest contraction since the 1970s. Factory floors and shopping centres were vacant throughout February as the public health emergency halted the movement of hundreds of millions of people.
Industrial output contracted by 13.5 per cent in January and February, the fastest pace on record, the National Bureau of Statistics said on Monday. Retail sales plummeted 20.5 per cent in the first two months of this year compared with 2019 and urban unemployment hit 6.2 per cent in February, the highest rate ever publicly disclosed.
The pace of capital investment in the country, which creates global demand for building materials and machinery, was slowing even before the coronavirus crisis, according to Mo Ji, chief China economist at investment manager AllianceBernstein.
That means even a powerful stimulus programme in China would struggle to boost global growth. “No matter how much credit corporates take, there is nowhere for further capex expansion,” she said.
Neil Shearing, group chief economist at Capital Economics, said he expected China to launch a stimulus to engineer a recovery from what will probably be China’s worst quarter since the Cultural Revolution in the 1960s and 1970s. Capital Economics estimated that gross domestic product contracted by 13 per cent in the first two months of the year.
Mr Shearing expects the stimulus to be equivalent to about 2 per cent of GDP and come from various sources: targeted fiscal support in the form of loans and subsidies to the hardest hit employers and loosening monetary policy. In addition, the central bank could offer cheap finance to banks lending to the most affected sectors.
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This will cause the budget deficit to balloon this year and add to China’s already huge pile of debt. But Mr Shearing believes Beijing probably possesses the financial headroom to avoid slipping into a debt crisis.
“A significant stimulus would be an issue for China’s medium-term debt structure but it would not cause a short-term fiscal crisis,” he said.
China’s total debt load amounts to about 310 per cent of GDP, one of the highest levels among emerging markets, according to the International Institute of Finance.
“The macro stimulus effort is going to be much more timid than in 2009, as large-scale stimulus does not sit well with the current mindset of policymakers in Beijing,” said Louis Kuijs, head of Asia economics at Oxford Economics. He noted that the plan was estimated to be equal to just 1 per cent of GDP growth in 2020 compared with 9.7 per cent in 2009.
Chen Yulu, PBoC deputy governor, noted recently in the Financial Times that the central bank intended to maintain “normal monetary policy”, signalling it would avoid introducing negative rates.
“My sense is that the leadership, even at the current moment, puts greater emphasis on financial stability than was the case in 2008 and 2009,” said Nikolaj Schmidt, chief international economist in the fixed income division of investment manager T Rowe Price.
China will eventually play a role in the global recovery, said Helen Qiao, chief greater China economist at Bank of America. As normal economic conditions return to the country, policymakers are expected to roll out fiscal and monetary stimulus that will raise demand for materials and goods overseas in the second half of the year.
She added: “There’s a good chance that China was the first to go down and will be the first to come back.”