China: Terrible GDP contraction means a fat U recovery - ING

Iris Pang, ING's Chief Economist, notes that China’s GDP went into deep contraction in 1Q20, and signs of a recovery in activity are mixed.

"GDP contracted 6.8% year-on-year in 1Q20, the last time we saw such a big contraction was back in 1967 when China saw the economy shrink -5.8% during the Cultural Revolution. The contraction this time is a result of city lockdowns and strict social distancing measures but the comparison provides us with a sense of how big an impact Covid-19 has had."

"Fixed asset investments contracted 16.1%YoY in 1Q20 but rose 6.05%YoY in March."

"According to the National Bureau of Statistics, there were many items that experienced a slower contraction in Jan-Mar compared to in Jan-Feb. That means there are signs of some growth in investment in March. But it is still too soon to gauge the effectiveness of stimulus measures on investment."

"Industrial production shrank 8.4%YoY in 1Q20 but shows signs of heading back to recovery in March as the shrinkage narrowed to 1.1%YoY during that month."

"Retail sales in March fell 15.8%YoY after falling 19.0%YoY in Jan-Feb. Retail sales show some improvement in terms of the variety of spending. It was not just food and medicine as in Jan-Feb, but also telecommunication equipment (+6.5%YoY), which is most likely purchases of smartphones."

"Monetary easing and fiscal stimulus will certainly continue."

"We expect a 20bp cut in the 1Y Loan Prime Rate on 20 April. Apart from that, there will be more targeted RRR cuts, which should focus on inclusive finance so that SMEs, which are employers of many workers, can get loans from banks."

"We have downgraded China’ GDP growth further to -3.1%YoY in 2Q20, -0.5%YoY in 3Q20 and 4.5%YoY in 4Q20. 2020 full-year growth is projected at -1.5%."

"USD/CNY has been affected by the changes of cases and death tolls of Covid-19 globally. We are revising the yuan to depreciate less than in our previous forecasts to USD/CNY at 7.15, 7.0 and 6.9 by end of 2Q, 3Q and 4Q20, respectively."