China Economy Contract in Q1 2020, Fundamentals Intact

April 17, 2020
China Economy Contract in Q1 2020, Fundamentals Intact April 17, 2020 Lennox Hamilton

China’s GDP (Gross Domestic Product) contracted 6.8% y-o-y in the quarter ended March, after recording a 6% expansion in the earlier period, and fared worse than economists’ expectation for a 6.5% drop.

It was the first economic contraction since the data was released for the first time in 1992. The economic contraction was caused by the outbreak of coronavirus disease, increasing pressure on government entities to support growth amidst rising unemployment and worries about social stability while maintaining debts and financial threats within limits.

The world’s second largest economy shrank by a seasonally adjusted 9.8% q-o-q in the quarter ended March 2020, after reporting a 1.5% q-o-q in the December quarter.

Economists hand anticipated the Chinese economy to contract by 9.9%.

It was the first quarterly contraction on record, as the COVID-19 outbreak resulted in shutdown of production and other economic activities.

Despite the economic contraction, the Shanghai Composite Index opened with gains on Friday, with the benchmark index rallying 16 points to trade at 2,836, reflecting the highest reading since March 16.

Authorities in China added to did their best to create optimism among market participants by informing that the number of newly confirmed cases of virus declined to a two week low as infections due to foreign tourists declined considerably.

Tech stocks, consumer non-cyclicals, consumer discretionary, industrials, telecom and energy. Healthcare stocks and utilities, however, saw erosion in value.

Industrial capacity utilization rate in China plunged to a record low of 67.3% in 1Q20, from 77.5% in the earlier quarter, as Beijing combats the COVID-19 outbreak.

The utilization rate decreased in all sectors: mining (67.1% compared with 75.1%), electricity, heat, and gas, water production (67.8% versus 73.6%) and manufacturing (67.2%, down from 78% in Q1).

China’s industrial production fell 1.1% y-o-y in March, after a 13.5% slump in January-February period, and compared with market anticipations for a 7.3% decline, amid a slight rebound in the economy following prohibitions on business activities and of tourist movement due to coronavirus outbreak.

Manufacturing output declined at a slower rate than the earlier month (-1.8% vs -15.7%). Both mining (4.2%, compared with -6.5%) and electricity, heat, gas and water production and supply (8.9% vs -14.4%) posted a reversal.

Among sectors, output fell in agriculture (-4.8%), general equipment manufacturing (-5.4%), automotive (-22.4%), metal products (-1.6%), rubber and plastics (-5.5%), non-metallic mineral products (-4.5%), power equipment (-1.7%), and electrical machinery (-0.4%).

On the contrary, production increased for pharmaceuticals (10.4%), chemical raw materials and products (0.7%), food manufacturing (5.7%), and ferrous metal smelting (4.1%).

Another economic data released earlier today indicated that China’s retail trade fell by 15.8% y-o-y in March, following a 20.5% decline in January-February.

The recent figure was below market’s view for a 10% decline, amid continuing COVID-19 outbreak that keeps people locked up in their homes and restricting visits to restaurants, movie theaters and shopping malls.

Sales dropped further for several categories: cosmetics (-11.6%), garments (-34.8% against -30.9 in January-February), home appliances (-29% compared with -30%), furniture (-22.7%, compared with -33.5%), oil, oil products (-18.8%, down from -26.2%), telecoms (6.5% vs-8.8%), automobiles (-18.1% vs -37%), jewelry (-30.1% vs -14.1%), and building materials (-13.9% vs -30.5%).

Notably, sales recovered for both personal care (0.3% versus -6.6%), and office supplies (6.1% compared with -8.9%).

After publishing the GDP data, the National Bureau of Statistics said China’s future growth potential will not be impacted by the near-term spillovers of the coronavirus disease.

The outbreak, as per media spokesperson Mao Shengyong, is the toughest health problem since the founding of China. He further affirmed that Chinese economic fundamentals remain unchanged.

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