Policy easing, lower renminbi, likely for China: Natixis

February 3, 2020

HONG KONG - The immediate impact on China of the current coronavirus outbreak is bound to be larger than SARS for two main reasons - China' s key growth area is now services, not manufacturing as in 2003, and because investor confidence has already been hard hit by the trade war - according to a research report released today by the global financial group, Natixis.

"How severe the coronavirus may be for Chinese economy will not only depend on the extent and depth of the virus outbreak but also on the government response," the report says.  

"The service sector, especially service consumption, is China's key growth engine nowadays, while this was not the case in 2003.

"Based on the SARS experience, the service sector is likely to be more severely affected than the manufacturing sector, especially for the transportation sector, which is an important component of services."

Natixis says investor confidence has already been hardly hit by the trade war, so it is will be hard to bring it back to positive territory.

"Furthermore, behind that negative investor confidence, there is the harsh reality that China is going through a structural deceleration due to negative population dynamics and the end of a long urbanisation process.

"In other words, the coronavirus is hitting a weaker economy than was the case with SARS. 

"Based on the above, and assuming that the peak of the coronavirus outbreak happens in the first quarter, we should be expecting a rapid deceleration in growth in the first quarter of 2020, and gradual stabilisation for the rest of the year."

However, the report says, this slow pace of recovery will not be enough for the Chinese Government to reach the very important target of the Nation's Rejuvenation, namely that of doubling China's GDP from 2010 to 2020.

"Given the importance of this objective, it seems clear that demand policies will be used to stimulate the economy as soon as possible. The bigger the shock now, the larger the policy expansion that will be needed to achieve the growth target."

Natixis says that such policy expansion, however, has an important constraint --, namely inflation, which might be pushed higher by limited supply of certain goods.

"This means that, in the short run, the PBOC may not be able to use interest rate policy but may need to rely on targetted lending and window guidance to steer the cost of funding down for the private sector.

"Against this backdrop, the exchange rate might be an easier demand policy to use and possibly more effective.

"We are already seeing signs of the latter. Moreover, weaker economic fundamentals and potentially laxer monetary policy will exert downward pressure on the RMB.

"Finally, fiscal policies in the form of targetted subsidies and potentially infrastructure investment may also be used.

"As such, we expect quick policy reaction to avoid a sharp correction in growth so that the Party's objective of income doubling can be achieved.

"Because of this, we only lower the forecasts from our previous 5.7% for 2020 to around 5.5%.

"Within this context, expect a weaker RMB and laxer liquidity environment for the real economy, even if not necessarily lower PBoC official rates."

www.natixisresearch.com (ATI).