Focus: Can China shield its economy from the impact of COVID-19?
China will likely miss its 2020 growth target due to the impact of the coronavirus pandemic on the global economy. Although the government is taking proactive measures to limit the impact of this shock, an increase in corporate insolvencies and structural fragilities is unavoidable.
The Communist Party of China (CPC)’s government is hoping to achieve a moderately prosperous society before its 100th anniversary in 2021, requiring approximately a 5.6% growth rate in 2020. However, the coronavirus (COVID-19) pandemic will add significantly to existing growth headwinds, such as the US-China trade war, structural factors and demographics. While the government appears to remain confident regarding their 2020 targets, it is likely these will have to be postponed until July 2021: the spread of COVID-19 to key markets in Europe and North America (30% of total exports) will drag on activity throughout the second and third quarters of 2020. As a result, Coface expects China to achieve a growth of only 4.0% in 2020.
China will resort to aggressive monetary and fiscal easing to achieve stabilization, but these will come at a cost. For instance, foreign exchange (FX) reserves are not sufficient to cover outflows, and this may exert depreciatory pressures on the Chinese yuan. On the fiscal front, additional infrastructure investments will add to indebtedness at the local level, resulting in pressures on the banking sector and highly indebted corporations. Increases in bond defaults and corporate insolvencies are likely, as are restructuring efforts in the banking sector. Given the delicate balance that will be required, the chance of a policy misstep is higher than ever.