Virus worse than GFC for China

China’s coronavirus epidemic is depressing its economic outlook.

Chinese shoppers are stockpiling consumer basics like toilet paper and water. Picture: AFP

China’s coronavirus epidemic is depressing its economic outlook, with new government readings on the manufacturing and service sectors validating informal indications that the country is struggling to get back to work.

A Chinese government index that tracks sentiment among purchasing managers at manufacturers fell to its lowest level on record in February, dropping deep into territory that indicates a contraction. China’s National Bureau of Statistics said on Saturday that its 15-year-old index tumbled to 35.7 from 50 in January — below even the lowest level recorded during the global financial crisis.

A related index that tracks purchasing plans in services industries plunged to a record low of 29.6 — deep below the 50 mark that separates expansion from contraction — suggesting weakness in construction, transportation, restaurants and tourism.

The reports are the first official economic checkpoints to be released during the crisis. They confirm a freeze that dates to late January, when authorities signalled the disease, now called COVID-19, was spreading faster than they thought. They then clamped down on countrywide transportation and business activity.

“Today’s PMI data suggests things are really bad,” said Larry Hu of Macquarie Group. The government could report a first-quarter contraction for the first time since the end of the Cultural Revolution, he said.

The disease and China’s response hammered both production and demand, said Zhang Liqun, an analyst with a government-linked business organisation, the China Federation of Logistics & Purchasing.

The statistics bureau, which releases the index together with the federation, predicted there would be some rebound next month as more manufacturers resume activity; authorities say the worst of the health crisis may have passed.

The fate of China’s economy is of crucial importance to a world with few solid drivers of growth. The country’s gross domestic product dipped to a three-decade low of 6.1 per cent last year, yet that was still enough to power about 40 per cent of the world’s economic expansion, according to the Organisation for Economic Co-operation and Development.

Economists predict China’s GDP will fall in the first quarter from the fourth quarter’s pace and finish the year weak. After the purchasing managers’ survey was published, ANZ said China’s GDP would slide to 4.1 per cent this year, including growth of just 2 per cent in the first quarter from a year earlier.

Purchasing by manufacturers is a leading indicator of business activity because factories buy supplies in anticipation of demand. February’s index result fell well short of the median forecast of 43 by economists surveyed by The Wall Street Journal.

China officially went back to work from an extended Lunar New Year holiday on February 10. But exhortations from President Xi Jinping and other officials to revive the economy have underscored concerns about what executives say are continued, widespread business outages.

Alternative indications of economic activity, including coal consumption by power plants, realtor data on home sales and congestion levels at ports, suggest economic activity at low levels usually seen only during holidays.

In recent days, Mr Xi said China will meet 2020 targets that include eliminating poverty and concluding a one-decade doubling of GDP.

Anticipating the jolt awaiting businesses, Mr Xi and other government leaders have pledged to cut their costs. China’s cabinet on Tuesday cut taxes for small businesses and ordered state-owned banks to issue more cheap loans while offering longer grace periods for borrowers to repay. The central bank has reduced interest rates and pumped hundreds of billions of dollars into the domestic financial system to support banks.

Prospects for a big hit to the economy and the spread of COVID-19 to dozens of countries have chilled financial markets, government planners and corporate executives. The Dow Jones Industrial Average fell 12.4 per cent last week, its worst showing since the financial crisis, as fear built that the globalised epidemic will damage trade and pull the world economy toward recession.

One of the biggest challenges for businesses in China has been government limits on the movement of people and a reluctance to travel. Authorities late last month sought to slow the epidemic’s spread by closing venues like restaurants and cutting off regions, while monitors limited access to some neighbourhoods and families stayed indoors. As of Saturday, 12 of China’s 31 provinces and municipalities retained emergency-level health advisories that limit travel, including Hubei province, where the outbreak was first detected. Beijing, Shanghai, Chongqing and the manufacturing province of Zhejiang also remain on high alert.

As the government reported a levelling out in the number of infectious cases this week, provinces like Guangdong and Jiangsu relaxed health alerts and reported the vast majority of businesses had reopened. Other indicators suggest the rebound remains very limited. Subway travel across eight major cities, including Guangzhou in Guangdong, was one-fifth of the usual on Thursday, according to a Wall Street Journal calculation using official numbers published by data provider Wind. The calculation doesn’t include the centre of the outbreak, Wuhan, where a subway system that normally carries 3.4 million passengers a day has been closed for weeks.

China’s Commerce Ministry said 90 per cent of the 7000 exporters surveyed reported difficulty shipping goods, as counterparts cancel contracts or don’t pay. The country’s largest steelworks, China Baowu Steel, predicted a first-quarter loss of $US428m. Surveys produced by chambers of commerce that represent international companies in China show executives bracing for a negative hit to revenue due to the epidemic.

The manufacturing sector is particularly vulnerable due to its reliance on labour. About 290 million people in China work somewhere besides their hometown, including 75 million whose jobs are in a different province. It is clear many who returned home for the Lunar New Year holiday in late January have stayed put.

“Most migrant workers are still not back from their hometowns,” said Yan Juanjuan, a recruiter at Sanhe Human Resources Market. And if they are back, local health rules in cities like Shenzhen crimp production by limiting how many people can be in one place.