After a contraction of the Chinese economy by 6.8% in the first quarter and uncertainty over markets abroad during the Covid-19 pandemic, the Chinese government decided not to set a GDP growth target for this year. Some analysts are expecting a second successive quarterly contraction, which would send the Chinese economy into its first recession since the end of the Cultural Revolution in 1976.

“We still expect 1% growth for the year, but a further contraction in the second quarter,” said Carlos Casanova, Asia-Pacific Economist at insurance firm Coface. “We cannot exclude the possibility of negative growth for the full year if there is another coronavirus outbreak in the autumn or in case of a deeper global recession.” Any recovery later in the year is dependent on no further viral outbreaks, no more lockdowns, and the stimulus measures announced at the delayed National People’s Congress (NPC) being effective.

For the most part, economists agreed that China should focus on more tangible and “practical” items like jobs, at a time when Beijing is facing an unemployment crisis. Peking University Finance Professor Michael Pettis said the decision to drop the growth target “is potentially good news for China if it represents a real change in economic policy”, signaling that it would focus on sustainable demand, consumption and private sector investment to drive growth. “If they have only dropped it temporarily while they try to figure out the full impact of the pandemic, and later select an implicit target that relies heavily on non-productive spending on infrastructure and real estate, then this really does not change anything,” Pettis said on Twitter. Shao Yu, Chief Economist at Orient Securities in Shanghai, said abandoning the GDP growth target was a “realistic” move, in line with public opinion amid the once-in-a-century challenge posed by the coronavirus. “Setting a numerical goal is way too mechanical for this year, so more emphasis was placed on protecting basic livelihoods, small companies and employment,” Shao said.

However, the shift away from a top-down growth strategy may present some challenges for local governments, which are hardwired to chase growth goals. “This is a fundamental change for a system driven by top-down signaling to ministries and local governments. How will everyone adapt?” asked Scott Kennedy, China watcher at the Center for Strategic and International Studies. Deng Feng, Professor at the Peking University Law School, added that removing the growth target will not stop provinces from competing with each other. “The Chinese political system is like a tournament, where there is always competition between local officials. Even if there is no GDP target this year, provinces would still want to exceed their competitors in terms of GDP, which heavily relies on infrastructure construction,” Deng said.

Analysts from the Economist Intelligence Unit (EIU) pointed out that “Premier Li Keqiang mentioned employment a total of 38 times” in his speech to the NPC, in a sign of how worried Beijing is about the situation. China will try to keep the surveyed jobless rate at 6.0% for 2020, which will be a significant challenge, given the fact that it peaked at a record 6.2% in February and was at 6.0% in April. The unemployment rate does not include the more than 300 million migrant workers.

Some analysts have estimated that real unemployment in China may be running as high as 20%. “The annual budget points to fiscal stimulus this year at least on a par with that following the global financial crisis, and while monetary policy is likely to remain more constrained than in 2009, the NPC did signal further rate declines and faster credit growth,” said Julian Evans-Pritchard, China Analyst at Capital Economics, as reported by the South China Morning Post.

As China’s first quarter gross domestic product (GDP) dropped by 6.8%, the first decline since 1992 when quarterly data began to be reported, amounting to CNY1.44 trillion in lost output, equivalent to the entire New Zealand economy in 2018. Although no quarterly figures were released before 1992, it could also be the first contraction since 1976. This foreshadows the enormous damage the Covid-19 pandemic could inflict on the global economy as a whole.

While many paint a dark picture of the Chinese economy going forward, and some even say that its four-decade growth miracle has come to an end, Chinese officials, economists and ordinary citizens alike offer a more balanced and nuanced reading of the data: the short-term pain is enormous, but the country remains resilient in the face of an unprecedented challenge, and economic expansion still has huge potential as the recovery accelerates, the Global Times reports. The economy expanded by 6.4% in the first quarter of 2019

Commenting on the Q1 contraction, Guan Tao, a former senior official of the State Administration of Foreign Exchange (SAFE), told the Global Times: “It’s no surprise at all. In fact, it falls right in the range of market expectations,” pointing to contractions in every sector of the economy from agriculture to manufacturing to services, as well as the evaporation of domestic consumption, investment and foreign demand. Manufacturing recorded the biggest decline of 9.6% year-on-year, followed by the services sector with a 5.2% fall, and a contraction of 3.2% in the primary sector. On the demand side, retail sales fell 19%, fixed-asset investment (FAI) dropped 16.1% and exports slid 11.4%. Nationwide, urban unemployment stood at 5.9% as of the end of the first quarter, though improving in March from the all-time high of 6.2% in February. China’s average individual disposable income declined by 3.9% during the first quarter.

Improvement was detected in March. Fixed-asset investment rose 6.05% from February. Some advanced manufacturing and high-tech services sectors saw even sharper increases, such as e-commerce. The decline in retail sales narrowed by 4.7 percentage points in March, compared with the first two months, including a 5.9% gain in online sales of physical products. The decline in total trade also narrowed by 8.7 percentage points to 0.8%. Most analysts said that the economy has already returned to expansion in the current quarter. Looking at the full year, China could compensate for the loss in the first quarter and record a 3% growth, Cao Heping, Economist at Peking University, told the Global Times. The IMF earlier last week forecast a 1.2% rise for China’s GDP in 2020 and 9.2% in 2021, compared with a 5.9% contraction in the U.S., a fall of 5.2% in Japan and a 7.5% decline in the euro zone this year.

Prior to publication of the Q1 GDP figure, 18 out of 20 prominent economists told the Global Times that China’s economy was likely to contract in the first quarter as a result of a sweeping halt in activity, the nation’s slow recovery of business operations, and a sudden slump in global demand because of the Covid-19 pandemic. They predicted a contraction ranging from 3% to 8%, but also foresaw a quick rebound starting in the second quarter as the country has basically contained the virus and the impact on domestic economic growth has been brought under control.

Chinese businesses have resumed normal operations at a much faster pace than anticipated, thanks to the timely measures enacted in the country to curb the novel coronavirus outbreak. By April 14, China’s major industrial enterprises had an average work resumption rate of 99% and 94% of the employees have returned to work, said Xu Kemin, an official with the Ministry of Industry and Information Technology (MIIT). Small and medium-sized enterprises (SMEs) had a work resumption rate of 84%, up from 76.8% at the end of March.

Foreign direct investment (FDI) in the non-financial sector fell by 10.8% on the Chinese mainland on a yearly basis to CNY216.19 billion in the first quarter of this year, the Ministry of Commerce (MOFCOM) said. FDI flows in March declined 14.1% on a yearly basis to CNY81.78 billion. Given the uncertainties in global markets, multinational companies have no plans to cut their investment plans in China as the country has been recovering more steadily from the epidemic and started exporting goods to other parts of the world, Ma Yu, Researcher at the Chinese Academy of International Trade and Economic Cooperation in Beijing said. China will see more FDI inflows in sectors like medical products, pharmaceuticals and high-tech industries until next year, added Ma. Information services saw 28.5% year-on-year growth in FDI flows, while e-commerce businesses notched up gains of 62.4% on a yearly basis, the China Daily reports. As of April 14, 72.8% of 8,700 surveyed major foreign enterprises have a business activities resumption rate of more than 70%.

China has not and will never see large-scale withdrawal of overseas capital, despite the impact of the coronavirus pandemic on foreign companies in China, Gao Feng, MOFCOM Spokesperson said. “The current global industry chain wasn’t formed in a short span of time and won’t be randomly changed by a single person or country,” he added. Gao stressed China’s unchanged attraction for foreign companies when asked to comment on recent media reports that the U.S. and Japanese governments had rolled out plans to pay for their companies to move out of China. A report by the American Chamber of Commerce in South China showed that 75% of the surveyed companies said the coronavirus wouldn’t change their plans to invest in China.

Contrary to expectations, the coronavirus outbreak did not hamper capital flows into the Chinese capital market. During the January-to-March period, foreign investors increased their holdings of onshore bonds by 48% from a year earlier, an increase of USD16.7 billion, while the market sentiment remained largely optimistic, according to the State Administration of Foreign Exchange (SAFE). The foreign exchange market is expected to remain stable this year, despite the external headwinds. China has no plan to decrease the foreign debt leverage, or the proportion of money borrowed from overseas in proportion to its GDP.

The latest IMF forecasts suggest that the global economy will contract by 3% in 2020, its worst performance since the Great Depression. The U.S. economy will contract by 5.9% this year, while China is seen growing by 1.2% in 2020. “China is likely the only major economy that will squeak out positive GDP growth for 2020,” David Chao, Global Market Strategist for Asia-Pacific, excluding Japan, at Invesco, said. “Whether that will be 1% or 3% is very much dependent on the government’s policy – specifically any additional fiscal stimulus packages that will drive growth in the second half.”

China’s market-based benchmark lending rate was lowered on April 20, another sign that the country is determined to channel funds into the real economy via a more flexible monetary policy, analysts said. The one-year loan prime rate fell 20 basis points from a month earlier to 3.85%, while the above-five-year LPR fell 10 basis points from the previous reading to 4.65%, according to the National Interbank Funding Center run by the People’s Bank of China (PBOC). Including the last reduction, China’s one-year LPR has dropped by a total of 40 basis points since last August.

This summary was compiled based on reports by the China Daily, Shanghai Daily, Global Times, the Guardian and the South China Morning Post.

China’s adoption of high technology is playing a vital role in reining in the coronavirus spread across the country, which are expected to be exported to help other countries fight against the virus, corporate representatives and analysts said. Domestic technology companies have developed specific technologies such as those for performing basic diagnostic functions, spraying disinfectants and conducting contactless delivery. China’s Alibaba Cloud announced it would offer free CT image analytics for COVID-19 to all countries and regions. Baidu told the Global Times that it launched online services such as medical and psychological consultations for overseas users. Chinese agricultural drone-maker XAG said since the virus outbreak, it has tried to combine drones with ground robots to release disinfectants in public places to replace hand sprayers. “We have seen rising demand for such services and received increased overseas inquiries. For instance, our clients in South Korea and Vietnam have begun to explore our solutions,” the firm told the Global Times.

“Developed countries like the U.S. have edges in research and developing advanced technology, but that does not indicate their application to epidemic prevention has been widely promoted,” Dong Lei, Key Account Manager of Shanghai-based technology company Inventec said. “I heard that robots are used to take patients’ temperatures in hospitals in California, but as far as I know, no artificial intelligence (AI) or facial recognition is used to monitor or prevent the epidemic spread,” Jack Luo, who is in his 20s and lives in San Jose, California, said. “An online real-time tracking platform for COVID-19 information focusing on the U.S. and Canada, which many of my friends and I used, was developed by a Chinese firm,” he added.

Xu Yiya, Senior Vice President of Shanghai-based Xiao-i Robot Technology Co, told the Global Times that his company has offered inquiry services about epidemic information to users in more than 30 cities across China. Industry analysts said the export of such high-tech related experience will be helpful, but some Western countries may not buy it because they do not believe in China’s technology development. “We just started trying to use drones to spray disinfectant in China, and since other virus-hit countries still restrict the technology, it is hard to predict the prospects for exports,” XAG said.

Technology companies from China, including Huawei Technologies, are leveraging their technological prowess to help foreign nations. For instance, Huawei Cloud and artificial intelligence company Huiying Medical Technology Co are offering AI-enabled auxiliary diagnostic systems to hospitals in Ecuador. Zheng Yelai, President of Huawei Cloud, said: “The AI-enabled system can help doctors make faster, more accurate decisions on whether patients are infected with the virus.” According to the company, it took only 14 hours for Huawei and Huiying to set up the AI-enabled system in a hospital in Ecuador. Hospitals in dozens of countries are contacting Huawei Cloud for possible cooperation to use the AI-enabled auxiliary diagnostic systems. Shi Yuxin, Deputy Director of the Shanghai Public Health Clinical Center, said that computerized tomography (CT) imaging is an important reference for the diagnosis and treatment of novel coronavirus pneumonia. AI-enabled systems can help classify the pneumonia caused by the virus according to its severity, and calculate the burden on patients’ lungs. Traditional quantitative analysis performed by humans usually requires up to six hours, but the AI system is able to perform the same task within a minute, Shi said.

The Hangzhou-based digital health company WeDoctor has launched an international traditional Chinese medicine epidemic prevention and control platform by partnering with the World Federation of Chinese Medicine Societies. Integrating WeDoctor’s internet healthcare structure and the federation’s TCM medical resources, the platform aims to promote online consultation services to better serve people overseas, the China Daily reports.

The use of high-tech also had an effect on McDonald’s. The company will shut down all of its restaurants in the UK and Ireland as the coronavirus outbreak there escalates, but it kept operating when the coronavirus hit China hard. Experts said that China’s advanced digital economy and logistics system explained the difference. China’s McDonald’s and KFC used non-touch ordering services in restaurants and encouraged customers to order using mobile phone apps. On China’s McDonald’s mini WeChat App, for example, customers can order and pay in advance on their mobile phones and choose a time to pick up their meals, which greatly limits people-to-people contact at the counter during the ordering process. In 2019, Chinese banks handled 101.431 billion mobile payments, with a value of CNY347.11 trillion, an increase of 67.57% and 25.13% year-on-year, respectively, the Global Times adds.

Carmakers and auto suppliers in Wuhan, capital of Hubei province, are resuming operations gradually after a hiatus of nearly 50 days. Dongfeng Honda, a joint venture of Dongfeng Motor Corp, commenced production in Wuhan two days after it got the written approval from local authorities, while Dongfeng’s Chinese-branded passenger vehicle subsidiary also resumed production. Wuhan-based Dongfeng is the country’s third-largest automobile group by sales, and has over 160,000 employees. It has partnerships with international companies like Honda, Nissan, PSA and Renault. “Dongfeng Honda has a large sales volume, so it is one of the first within the group to resume production,” said a Dongfeng staff member. Established in 2003, the joint venture has three plants in Wuhan, with a combined annual production capacity of over 600,000 vehicles, and employs over 12,000 people.

The Dongfeng employee told China Daily that Dongfeng Honda has not resumed full-scale operation because people in Wuhan need to get a health code from local authorities to travel within the city. Other joint ventures are expected to follow suit soon. A representative at Wuhan-based Dongfeng Renault said the company was scheduled to resume operations on March 16. Another Sino-French joint venture, Dongfeng Peugeot Citroen, said it is actively engaged in preparations for production, although it has not decided on the date. Hubei province, especially Wuhan, is one of the most important automotive manufacturing regions in China.

According to the National Bureau of Statistics (NBS), carmakers in the province produced 2.24 million vehicles in 2019, accounting for 8.8% of the country’s total. Besides Dongfeng and its joint ventures, U.S. carmaker General Motors as well as auto parts suppliers including Valeo, Webasto and Bosch have manufacturing facilities in the province. GM’s joint venture SAIC-GM said its Wuhan plant has got the necessary approvals from the local authorities to resume production. A representative at French auto parts supplier Valeo said its two plants in Wuhan have received the approval as well. Valeo also has two plants in Jingzhou, also in Hubei province, and they have been in production for a while. German auto parts producer Webasto said it has filed applications to restart production at its two Hubei plants – one in Wuhan and another in Xiangyang, and is also expected to receive official approval soon. Carmakers and auto suppliers in regions outside of Hubei province have been in production for a while, with most of their plants having opened in February.

Statistics from the China Passenger Car Association (CPCA) show that carmakers in the country produced 215,000 vehicles in February, down 80.6% from the same month last year. Passenger vehicle sales during the month slumped 78.5% year-on-year to 252,000 units. During the first two months, vehicle sales totaled 1.97 million units, down 41% from the same period a year ago. Cui Dongshu, CPCA Secretary General, expected sales will slowly rebound in March and April before reaching the normal level in May, if the epidemic can be effectively curbed by April, the China Daily reports.

Chinese auto sales dropped 79% to 310,000 units in February from a year earlier, the 20th consecutive monthly decline, according to the China Association of Automobile Manufacturers (CAAM). It was a 15-year low. The drop follows falls of 18% in January and 0.1% in December. In total, 2.23 million vehicles were sold in the first two months of this year, down 42% year-on-year, the Shanghai Daily reports. The Association had predicted auto sales were likely to fall 5% in 2020, a third consecutive year of contraction.

Factory activity in China’s manufacturing sector remained stable in January as the purchasing managers’ index (PMI) for the manufacturing sector came in at the neutral expansion/contraction threshold of 50. The January PMI reading was slightly down from 50.2 in December, according to the National Bureau of Statistics (NBS). The decline partly resulted from a slowdown in production growth due to the Chinese Lunar New Year holiday that reduced industrial activities. Also because of the holiday break, up to 17.6% of the surveyed enterprises have complained about insufficient labor supply, 2.1 percentage points higher than a month ago.

The survey on China’s manufacturing and non-manufacturing business activities was conducted before Jan 20. On that day, an expert team of China’s National Health Commission (NHC) confirmed human-to-human transmission of the coronavirus and infection of medical staff. “As the impact of the novel coronavirus outbreak on China’s manufacturing was not fully manifested during the period of the survey, we still need to further observe the trend afterward,” said Zhao Qinghe, Senior Statistician with the NBS. One of the main features of the latest manufacturing PMI is that the new orders index increased for the third straight month in January, up by 0.2 percentage point from December, to 51.4. It shows the acceleration of growth of demand in the manufacturing sector and the slowing of production growth, Zhao said, as reported by the China Daily. The non-manufacturing business activity index increased by 0.6 percentage point from the previous month to 54.1 in January.

Spring Festival is traditionally a peak holiday travel time, during which Chinese make inbound and outbound trips and embark on shopping sprees, providing a robust stimulus to the nation’s economic output at the beginning of the year. This year, as Chinese authorities imposed travel restrictions and millions of Chinese canceled travel plans in an effort to combat the epidemic, the contribution of consumption to the Chinese economy is likely to wane significantly, industry insiders said.

Chinese authorities are using monetary tools and strengthening government spending to slow the weakening of economic activity due to the novel coronavirus outbreak. Ample liquidity is aimed to prevent a sharp sell-off as financial markets reopened on February 3. As of January 29, central and local governments had allocated CNY27.3 billion of subsidies for epidemic prevention and control, the Ministry of Finance reported. Tax and financial policies will support companies offering medical supplies. Some large banks, including China CITIC Bank, have said they will lower the lending rate for companies affected by the novel coronavirus.

Economists have difficulties to predict the full impact on China’s and the global economy. Some conservative estimates say the coronavirus outbreak may drive down China’s economic growth by more than 0.5%. “The coronavirus could deal a more severe blow to China’s economy in the near term relative to SARS in 2003,” said Lu Ting, Chief Economist in China with Nomura Securities. Due to the SARS outbreak, real GDP growth plunged by 2 percentage points from the first quarter to the second in 2003. But the coronavirus may prove to be only a temporary shock and may not necessarily leave a long-lasting impact, according to Lu. “We expect a V-shape recovery due to some strong pent-up demand as well as pent-up production following the potential containment of the coronavirus.”

Especially small companies may be vulnerable to the effects of the virus outbreak. “I’m anxious and worried. This is a battle for survival, but I’m losing territory,” a manager of a small robotics company in Shenzhen, Guangdong province surnamed Yang told the Global Times. Yang’s factory employs about 500 people, but has suspended operations due to concerns over the spread of the coronavirus. Yang does not have a date when his factory will resume operations and said it depends on when the epidemic will be under control. “Our spending, mostly in factory rental cost and employee salaries, is amplifying day by day. But we don’t have an income source. If production does not resume before mid-February, the direct and indirect economic loss could be millions of yuan,” Yang said. Across Guangdong, known as China’s manufacturing base and trading hub, a mixed mood of sobriety and anxiety is spreading among entrepreneurs. Some pointed out that if the disruption is extended, many small- and medium-sized manufacturers would be mired in a capital crunch and could even face bankruptcy, the Global Times reports.

Goldman Sachs has forecast that the virus could knock Chinese growth down to 5.5% for the year, from 6.1% in 2019, with knock-on effects for the rest of the world economy.