China's GDP contracts for first time in 40 years: industry reacts

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China's GDP contracts for first time in 40 years: industry reacts

For the first time since records began, China has posted a YoY decline in its economic output, with official figures showing a contraction of 6.8% for the country's first-quarter GDP.

Today's figures, published by Beijing's National Bureau of Statistics, break an uninterrupted run of economic growth spanning four decades.

Although China first began reporting its GDP statistics only in 1992, most analysts said this is the first time the country has seens a year-on-year decline in more than 40 years.

The nature of this shock is really different than anything we’ve ever seen in our lifetimes. I don’t think we’ve seen anything like this since 1976."

Andrew Tilton,

The fall in quarterly GDP follows a 6% growth in the 4Q2019.

Mao Shengyong, a spokesman for the National Bureau of Statistics, told the FT, "We cannot say that the fundamentals of China's long-term economic progress have changed because of a short-term shock."

Despite the "astonishing" decline, Beijing insists this is a very short-term shock, and is forecasting a return to growth of 5% averaged over the next two years.

Andrew Tilton, chief Asia-Pacific economist for Goldman Sachs, told the Wall Street Journal, "The nature of this shock is really different than anything we've ever seen in our lifetimes. I don't think we've seen anything like this since 1976," referring to the year Mao Zedong died.

Here II rounds up some of the other industry comments from around the world:

Ken Wong, Asia Equity Portfolio Specialist at Eastspring Investments, the Asian asset management arm of Prudential, said: ""If we use China as a base case scenario for the rest of the world in terms of its economic recovery from covid-19, it would take about 3 months from the initial lockdown to see manufacturing activities normalizing while the services sector could take about 6 months to see numbers back to more normalize levels."

Alastair Campbell, investment manager at Kames Capital, wrote: "The -6.8% GDP contraction for 1Q 2020 in China was slightly worse than the -6.2% consensus forecast.  However, I had seen -9% and -10% from some respected economists. Crucially, fast moving sequential data showed an improvement in March over February - for example, power demand in March was -4.2% YoY versus -7.8% for Jan-Feb.  GDP forecasts for the year for China are now +2-3% YoY, but the consensus keeps shifting.

"The second quarter is expected to continue to see gradual recovery as demand recovers and supply comes fully back online.  Schools in Shanghai and Beijing are returning from now into May on a phased basis, which is another positive."

"The main hit will come from the contraction in exports, but Chinese equities have performed relatively well year-to-date, and we are overweight as we foresee gains from here."

Robert Alster, head of investment services at Close Brothers Asset Management, said: "As the world starts to get to grips with Covid-19 and its impact, we're beginning to get a clearer picture of the economic challenges ahead. It has been estimated by the IMF that most economies will emerge around 5% smaller, with scars that may never fully heal. But Beijing is better placed than most to rebound and when all is said and done, China is likely to be the best performing large country in the world.

"There are signs that the country may be starting to emerge from the gloom. BMW is reopening its Chinese factories and retailers are throwing open their shutters. However uncertainty persists and consumers may need more confidence before they return to more typical spending habits. The data makes it clear that there is a long way to go to recovery, but global hopes are pinned on China being on the right track, however weak external demand might make this a tough hill to climb."

'Extraordinary... a stark forewarning for the UK'
Richard Pearson, director at investment platform EQi commented: "A 6.8% drop in GDP is an extraordinary shock to the Chinese economy, and by implication the rest of the world. This is an important indicator as we consider the potential impact for the West because we are still in the throes of the pandemic. It is likely that the impact on the UK will be more severe due to the different nature of the government responses between the West and China, which seems to have resulted in lower recorded deaths in China.

"Clearly such an indication isn't the best news for UK investors, but there may yet be light at the end of the tunnel as the infection rates plateau. In the meantime, people should avoid stock watching, as this will only tempt them into a knee-jerk reaction.

"The true extent of the damage to the UK economy and consumer confidence remains to be seen - we won't know the true figures for some time yet. Keeping a level head and staying focused on your long-term investment goals is the best thing to do at this time."

Cormac Nevin, investment analyst at Beaufort Investment, said it could have been worse, but advises caution: "The quarterly Chinese GDP figures released overnight came in at -6.8, below Analyst expectations of -6.5% and representing the first official negative print since the late 1970s. But as with all Chinese economic data, it's worth treating with a certain caution. The GDP rate targeted by the Chinese Communist Party for the past 10 years has hovered tightly around +6.8%, so it is poetic that the first negative print happens to simply reverse the direction.

"Asia-Pacific stock markets seemed untroubled by the data release, and rose on the hopes of further global economic re-opening. However quickly economies re-open though, the stark rises in unemployment and falls in consumer income are likely to take far longer to resolve, which markets may currently not be sufficiently appreciating.

"While we expect markets to remain volatile for the remainder of the year, the rally since 1April is a prime example of why it's critical to remain invested throughout the market cycle - no matter how painful the prior drawdown may have been."

This optimism is shared by Andy Rothman, an investment strategist at Matthews Asia, who argues China is already on the road to recovery: "Chinese consumers are relatively optimistic about the future, according to a survey conducted in 56 cities between March 26 and April 6 by the China Quantitative Insight team at Credit Suisse. Of the 800 consumers surveyed, 50% said they expect their family's disposable income will be higher in 12 months, and another 36% said it will be the same as the current level."

U or V?
Commenting on the nature of China's would-be recovery, Brooks Macdonald commented: "Just as we are seeing economic activity move into and out of an unprecedented period of forced contraction, so financial markets have also had to navigate a similar path. Investors are trying to determine whether the shape of the recovery is a relatively quick ‘V' shaped rebound, or a more gradual U-shaped improvement. But there is an important difference between economies and stock markets however.

"While underlying economies might take longer to recoup lost activity, financial markets will continue to look beyond covid-19 as they look for an investment road-map. The level of unprecedented ongoing monetary and fiscal policy accommodation is encouraging investors to look further out on their investment horizons. With policy support expected to outlast the virus, it means that the economic recovery upswing when it comes could be very pronounced indeed."

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Christopher Copper-Ind

Christopher Copper-Ind is editor-in-chief of International Investment. Before this, he was editorial director of The Business Year, from 2014 to 2017.