Latest Economic Research

China is living through another stop-go cycle even though the stop, COVID-19, is different this time. Policymakers recently said they aren't setting a GDP growth target this year. The new target is jobs but a sluggish service sector means a slow jobs recovery and more stimulus. Financial conditions confirm stimulus is arriving. This will lift growth for a while (our forecasts are 1.2% for 2020 and 7.4% for 2021), but a tightening will follow in 2021.

China's economy is healing. Indicators point to a U-shaped recovery assuming COVID-19 remains contained. Unsurprisingly, healing is uneven. Large firms are finding their feet faster than small firms and industry is recovering faster than the service sector.

We estimate that just three months after the peak in COVID-19 cases in early February, large industrial firms were back at 95% of normal capacity. Manufacturing output rose by 5% in April compared with a year ago. Not all industries are firing at the same time, however. The technology sector has rebounded, autos have stabilized, and consumer goods are still below 2019 levels.

Equity Market

As the coronavirus has spread across continents, countries around the world are experiencing a slowdown in economic activity and volatility in the financial markets. The S&P Pan Asia BMI and S&P 500® lost 20.5% and 20.0%, respectively, in the first quarter of 2020. During the same period, the S&P China A Domestic BMI and S&P China 500 (which seeks to track the top 500 domestic and offshore listed Chinese companies) dropped 9.5% and 10.3%, respectively, which was only half of the loss suffered by the U.S. and Pan Asian markets.

Before coronavirus infection accelerated in the rest of the world, the rate of domestic outbreak in mainland China was the determinant driver of the Chinese equity market performance. During the market decline between Jan. 20 and Feb. 3, 2020, the vast majority of industries suffered losses; however there was a significant spread in industry returns, from 3.2% to -17.9%. Health care equipment, health care technology, and biotech were top-performing industries due to the threat of the outbreak. As cities in China were locked down and travel was restricted to control the outbreak, airlines, retailers, restaurants, and hotels took a hard hit, while companies in interactive media, internet retail, and food and staples retailing were least affected. Semis, software, electronic equipment, and tech hardware companies were also less hammered by the domestic virus outbreak and they were among the top performers during the market rally between Feb. 3 and Feb. 20, 2020, when coronavirus infection rates slowed in mainland China.

APAC Economic Research

S&P Global Ratings now expects a steeper decline of economic growth in Asia-Pacific in 2020. We forecast a 1.3% contraction this year before growth of 6.9% in 2021, compared with our previous projection of 0.9% and 6.7%. This means our GDP forecast for the region for 2020 and 2021 is about $2.7 trillion lower than before the pandemic began. Asia-Pacific has shown some success in containing COVID-19 and, by and large, responded with effective macroeconomic policies. This can help cushion the blow and provide a bridge to the recovery. Still, by the end of 2023, we expect permanent damage to the level of output of between 2% and 3%. Risks are more balanced as pandemic curves flatten but remain prominent.

China's Impact

As investors grapple with the economic fallout of COVID-19 and seek to understand its impact, China has become an unexpected stabilizing force in emerging markets. Despite being the epicenter of the outbreak, Chinese equities have experienced lower volatility, minimal currency fluctuation, and less exposure to falling oil prices in the recent market environment in comparison with emerging market peers.

On Feb. 19, 2020, U.S. markets closed at their all-time high. The following days and weeks would see a precipitous drop in global markets, as the pandemic became the primary concern. By March 23, 2020, the S&P Emerging BMI had declined 31.9% to its recent low, in a matter of just over four weeks since signs of slowing started in the U.S. However, not all emerging regions fared equally, and China—the epicenter of the virus and the first to suffer the most drastic economic consequences—outperformed broader emerging markets by more than 20 percentage points in the first quarter.

Sector Impact

As COVID-19 retreats in China, with the numbers of new daily cases stabilizing at double digits, the country's banking system is surveying the damage. The crisis will test lenders' resilience with more than a 50% increase in nonperforming assets likely in 2020 amid a halving in Chinese GDP growth. S&P Global Ratings expects the outbreak will exaggerate the pecking order of Chinese banks. Regional lenders with a high exposure to small enterprises will be hit hardest, while the biggest banks will likely come through the turmoil with enhanced market position.

To get a sense of how Chinese banks will fare in a post-COVID-19 world, S&P Global Ratings looks at the industry along three dimensions: exposure to Hubei province, exposure to small enterprises, and exposure to industries hit hard by the outbreak.

About one-third of Chinese bank loans are in sectors significantly stressed by the pandemic. Regulators will likely give banks leeway to offer forbearance (debt rollovers, payment extensions, etc.) to borrowers hit by the outbreak. Banks are allowed to extend loan repayments from borrowers with sound credit standing to June 30, 2020. Some of these loans will see a payment extension of more than 90 days, which under normal circumstances, would have been classified as an NPL.

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Further Reading