Previous Quarterly Editions
Expropriation Risk: 60 60 62 64 Political Violence Risk: 38 42 43 49 Terrorism Risk: 32 32 32 32 Exchange Transfer and Trade Sanction Risk: 49 51 50 53 Sovereign Default Risk: 40 40 40 43
TREND ▲ OUTLOOK ▲
The economic cost of the COVID-19 outbreak to China became clear with the April 2020 release of figures from the National Bureau of Statistics. GDP fell by 6.8% year-on-year in the first quarter of 2020 as industrial production dropped by 8.4% and fixed investment by 16%. A particular concern highlighted in the first quarter figures is that private sector activity fell much faster than state-led activity. This is a problem because the more private firms that go bankrupt or shed jobs, the more disjointed the recovery will be. Against this background, further government stimulus is likely, with more public works and infrastructure construction started in an effort to protect jobs and stave off the immediate possibility of social unrest. The risk is that reverting to the old state-led investment model will bolster the recovery but could also damage financial stability and so threaten medium-term growth. The export sector has clearly been hit hard. Goods exports in USD fell by 6.6% year-on-year in March 2020, having lost 17.2% year-on-year in January and February 2020 together, and the global slowdown will continue to affect these figures. Even the tech sector has suffered as countries delay the roll-out of 5G services. This makes the state of relations with Washington even more important. The COVID-19 pandemic has not stopped the Trump administration’s mixture of pragmatic and hard-line rhetoric and action towards China on trade and investment issues. However, it has become evident that pragmatism is guiding the early implementation of the Phase One trade agreement between the two countries that came into effect in mid-February 2020, with the White House reserving its harder line for efforts to curtail China’s telecoms giants, Huawei Technologies and ZTE Corporation. It also seems likely that bilateral relations more broadly will be tempered by the shared near-term need to regenerate economies, while the interdependence of the two economies has been highlighted by the pandemic’s disruption of global supply chains. At the same time, however, China has been positioning itself as a leader in the global response to the COVID-19 pandemic, drawing on its industrial base to ramp up production and using its ability to prioritise the supply of medicine and personal protective equipment to friendly or potentially friendly countries that have included the Philippines, Peru and Spain, as well as Japan. The hope is that this display of China’s industrial capacity will prompt smaller states to consider closer partnerships with Beijing and involvement in Beijing-led initiatives such as Belt and Road. Meanwhile, at home the government has drawn on the lessons of the SARS outbreak to prioritise the food delivery system not only to get food to market but also to ensure that animal feed and financial support gets to pig producers, who were heavily hit by African swine flu last year, and poultry farms, which quickly moved to slaughter as local markets closed. It has also tried to ensure that seed stock and fertiliser reached farmers in time for spring planting. However, the COVID-19 outbreak has impacted all aspects of the food and agribusiness sectors in China, from farmers to retailers, and may well affect China's international trade in farm products.
Although rather lost amid wider COVID-19 concerns, Beijing’s escalating restrictions on US journalists have become a particular worry for foreign investors. In February 2020, Washington reclassified five Chinese media outlets, including the official news agency, Xinhua, and the English-language China Daily, as foreign missions, a designation that carries new rules on registration. China then expelled three Wall Street Journal reporters after the newspaper published a critical opinion piece. But its expulsion in mid-March 2020 of 13 US citizens working for three newspapers, the New York Times, the Washington Post and the Wall Street Journal, was an unexpectedly aggressive step. These moves against foreign reporters will not only mean fewer independent researchers on the ground but greater pressure on those who remain to be more circumspect, reducing investor confidence.
As it began lifting virus-related restrictions in Wuhan in April 2020, China encountered the risks of social unrest as lockdowns are eased. Members of the public, no longer afraid of infection if they gather, proved ready to vent pent-up grievances, demand compensation for losses incurred as a result of the lockdown, and challenge remaining lockdown procedures that they view as unnecessary. Shop owners in Wuhan staged a protest in a busy shopping area in April 2020 as they sought rent relief for the period during which the lockdown left them unable to operate, and similar protests took place in Hunan province. The China Labour Bulletin, an NGO, has been reporting protests over wage arrears in various locations and industries, usually involving smaller firms that have less access to government aid. The government appreciates the need to handle these outbursts carefully and expects them to be short-lived.
TREND ► OUTLOOK ▲
COVID-19 has prompted the government and private technology companies to focus resources on the rapid development of new surveillance technologies. Among those that quickly became widely used are apps that can trace movements and possible contacts, and apps that assess a user’s potential for infection and send either a green, yellow or red QR code to their mobile phone. That QR code then becomes the key for accessing residential compounds, businesses, schools, public transit, and shops. At the beginning of the crisis it became apparent that facial recognition technologies could not handle the sudden and widespread use of face masks, but new algorithms have since been developed that can handle face masks and the Ministry of Public Security is already using them on a large scale. The government is fully aware of the potential to use these social monitoring systems in an anti-terrorism context.
The central bank was already trying to encourage greater commercial lending to small and medium sized businesses before the virus struck, and it is now heavily involved in stimulus efforts once again. In April 2020, it added more than 50 billion USD in liquidity to the economy, cut its main lending rate from 3.15% to 2.95%, and lowered reserve requirements for all but the largest banks. More moves are expected, although they are likely to concentrate on reducing reserve requirements rather than interest rates because of fears about inflation. The central bank is also reviving its earlier interest in digital currency.
The government accepts that a much-expanded budget deficit is now both necessary and inevitable and is preparing to issue more local government special bonds as well as special treasury bonds, which have not been used in over a decade. Before the impact of COVID-19, the combination of rising debt and slowing growth meant that at some point China will have to sacrifice a portion of its growth if it wants to reduce its debt burden, but for the short-to-medium term the emphasis is now firmly back on using debt to sustain growth.
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