CAIXIN GLOBAL INTELLIGENCE BRIEF

Feb. 07 Executive Summary

The Novel Coronavirus (2019-nCov) outbreak has severely disrupted the Chinese economy since mid-January this year. Economists broadly agree that the shock should be temporary but will drag down economic growth for 2020. Caixin Global Intelligence (CGI) has compiled a brief covering the current status, timeline of events, and overview of economists’ expected potential impacts and responses.

1 2 Timeline

Dec.08 First after virus breaks species barrier in

Wuhan health commission acknowledges "mysterious " and alerts hospitals, in a Dec.30 memo later leaked to the public

National Health Commission sends team of experts to Wuhan, led by prominent epidemiologist Dec.31 and pulmonologist Nanshan

Huanan Seafood Wholesale Market closed; Wuhan police punishes eight doctors for "spreading Jan.01 rumors" about virus

41 patients in Wuhan confirmedto have contracted the virus, including 27 with direct exposure Jan.02 to the Huanan Seafood Wholesale Market

Jan.07 Pathogen of unexplained viral pneumonia identified as a Novel Coronavirus

Jan.09 First death

Jan.10 Virus genome sequenced

Jan.13 First confirmed caseoutside of

Jan.19 China confirms first cases outside of Wuhan

Zhong Nanshan reveals person-to-person transmission; Premier urges decisive Jan.20 efforts to control the epidemic

Zhong Nanshan reveals person-to-person transmission; Premier Li Keqiang urges decisive Jan.20 efforts to control the epidemic

Officials announcequarantine of Wuhan effective the next day; NorthKorea closes its border, Jan.22 the first country to do so;WHO holds first emergency meeting to determine if virus constitutes a "public health emergency of international concern" (PHEIC)

First confirmed incidence ofhuman transmission outside China; almost all cities in Jan.24 enforce quarantine

Jan.25 U.S. announces plan to evacuate consular staff from Wuhan by charter jet

Jan.26 Lunar New Year holiday extended

Jan.30 confirmed in every Chinese provincial-level region; WHO declares PHEIC

Feb.02 First quarantined city outside of Hubei, with strict limits on travel in Wenzhou, Zhejiang province

Financial markets reopen, and crash. Shanghai Composite Index had dropped 7.71% at closing, Feb.03 with copper, crude and palm oil sinking by the maximum allowed.

Commodity markets remain in turmoil. China National Offshore Oil Corp. hasdeclared force Feb.05 majeure to refuse delivery of LNG due to the coronavirus, and Chinese copper buyers have asked Chilean miners to delay shipments due to port shutdowns

Stock markets start to recover from the sudden crash. Shanghai Composite Index has gone up Feb.06 for 3 consecutive days and recovered roughly 40% of Feb. 3 losses

Li Wenliang, a doctor in Wuhan punished by police for “spreading rumours” after warning his Feb.07 colleagues and friends that a “SARS-like” virus was spreading, dies of 2019-nCov infection, sparking massive public outrage

Caixin survey of economists suggests the coronavirus epidemic will increase January CPI, Feb.07 with a median forecast of 4.9%

3 Policy Response Roundup

Sunday, Jan. 26 China Banking and Insurance Regulatory Commission (CBIRC)

◆ instructed banks and insurers to help those who lose income due to the epidemic, allowing them to delay repaying mortgage loans and credit cards

◆ called financial institutionsnot to arbitrarily stop lending to suffering firms, especially for small businesses, and those in the retail, wholesale, logistics, food service and tourism industries

◆ urged insurers and banks to open fast-track ‘green channels’ to increase support to business and individuals in affected areas

◆ asked insurers to prioritize settling claims from customers affected by the epidemic Ministry of Finance (MoF) ◆ departments at all levels issued a combined 11.21 billion yuan for epidemic response efforts

Tuesday, Jan. 28 Ministry of Finance ◆ earmarked 4.4 billion yuan for epidemic response efforts, including 500 million yuan specifically for Hubei province

Saturday, Feb. 1 People’s Bank of China (PBOC) Deputy Governor Pan Gongsheng said the central bank will offer 300 billion yuan ($43.3 billion) in low-cost funds to banks in Hubei province for them to provide low-interest loans to enterprises producing urgently needed medical supplies and daily necessities

Monday, Feb. 3 PBOC ◆ lowered 7- and 14-day reverse repo interest rates by 10 basis points and provided 1.2 trillion yuan of liquidity in open market operations

◆ total amount due for renewal was 1.05 trillion, resulting in a net injection of 150 billion yuan, increasing liquidity in the banking system over 2019 levels by 900 billion yuan

Tuesday, Feb. 4 PBOC ◆ pumped 400 billion yuan into the banking system with reverse repurchase agreements, in the largest single-day addition since January 2019

Wednesday, Feb. 5 State Council ◆ asked regulators to ensure that support loans have interest rates below 1.6% ◆ State Council will cover the gap between 1.6% and the market interest rate

Beijing municipal government ◆ announced that while failing to pay social security payments would damage credit standing, the deadline for companies in certain industries to pay their social security contribution has been extended to July

4 Lian Weiliang National Development and Reform Commission Vice Chairman

The impact from the coronavirus outbreak on China’s consumption is getting worse, especially on transport, tourism and the movie box office. But the economic hit from the coronavirus outbreak will be temporary.

Zhong Zhengsheng Caixin Insight Group Chief Economist

While the outbreak’s impact on necessity consumption is temporary and will recover easily afterwards, the impact on discretionary spending will not be as easily recovered. The outbreak has also been negative for private enterprise confidence, which was on a recovery course before the outbreak.

Similarities and differences with SARS ◆ Both SARS and the coronavirus will only have a temporary impact on the overall economy, but the policy response will be a determining factor for the pace of recovery.

◆ SARS hit a rapidly growing Chinese economy that was nearly overheating, whereas the coronavirus came as China was just about to exit a slowdown cycle. This key difference in the economic cycle means policymakers must carefully maintain healthy expectations and pump up confidence among business owners.

◆ The industrial landscape has changed dramatically since 2003. In the first two quarters of 2019, the service sector contributed 60.7% of GDP, while in the first two quarters of 2003, it was 42.5%. The financial sector also accounted for a higher proportion of GDP in 2019 at 7.8%, compared to 4.8% in 2003. Financial turbulence will have a greater impact on the overall economy than during SARS.

5 Ren Zeping Evergrande Think Tank Director and Chief Economist

◆ Spring festival consumption growth used to be a good indicator of consumption in the year ahead but will not be in 2020.

◆ Restaurants and retailers recorded sales of more than 1 trillion yuan in the seven days of the 2019 Lunar New Year’s holiday. I expect just half of that total for the 2020 holiday.

◆ In all scenarios, first quarter growth will be hit hardest and drop to 4%. Growth for the year may decrease to between 5.0-5.4%, depending on how long it takes to fully contain the virus.

Huang Yiping National School of Development Professor

◆ Fiscal policy should be the main tool for dealing with economic aftermath of the pandemic; the state can abandon the 3% fiscal deficit redlineif necessary.

◆ Moderate monetary policy easing is also necessary; the PBOC can lower LPR benchmarks, for example.

◆ Policies supporting small and medium enterprises and employment, such as tax breaks, are crucial.

◆ Policymakers should support online consumption and other “new economy” services for people staying at home.

6 Tsinghua and Peking University

A study by the Peking University HSBC School of Business and Tsinghua University School of Management’s Center for Business Model Innovation surveyed 995 SMEs about how they will survive the crisis, finding

◆ Both SARS and the coronavirus will only have a temporary impact on the overall economy, but the policy response will be a determining factor for the pace of recovery.

◆ 30% expect annual operating income to decline by more than 50%, with 58% expecting a decrease of more than 20%

◆ 85% of firms surveyed suggested theymay not survive 3 months

◆ 50% said they want the government to provide subsidies or relief in terms of social security, rent, payroll, and other costs

The authors recommend local governments act as fast as possible to

◆ Adjust tax and fee policies, and reducing or waiving statutory taxes, fees, and service charges related to SMEs ◆ Increase support from commercial and financial institutions

They suggest policy proposals including ◆ Debt relief and innovative financial instruments · The current PBOC policy does not mention whether loan principal can be written off; it could consider increasing the amount of bad debt banks are allowed to write off as SMEs find themselves unable to pay

· The China Securities Regulatory Commission should relax IPO conditions so that companies which fail to meet three-year performance standards due to the epidemic are still able to go public

◆ Establishing a national fund to rescue or revitalize SMEs · If the epidemic lasts six months to year, even companies with the ability to raise capital may struggle to access credit due to fear in lending institutions

· The national government may consider issuing special national debt to establish a revitalization fund, and act with an industrial and supply chain perspective rather than focusing solely on individual firms

◆ Once the epidemic is under control, the government may consider giving more days off for public holidays to help make up for some of the consumption lost as a result of the epidemic during the Lunar New Year

7 Outbreak Impact Forecasts

REPORT 1Q 2020 FIRM 1Q NEW 2020 NEW COMMENTS DATE OLD OLD

Down Caixin CEBM Feb. 03 - down 0.3-0.5 ppts - See above 1-1.5 ppts

Down High economic impact Oxford Economics Feb. 03 by more than 2 6% Down 0.6 ppts to 5.4% 6% but short-lived ppts

Down “Getting worse before Macquarie Feb. 03 5.8% Down 0.3 ppts to 5.6% 5.9% 1.8 ppts to 4% getting better”

Down Forecast biased to UBS Feb. 03 5.9% Down 0.6 ppts to 5.4% 6% 2.1 ppts to 3.8% downside risk

Bloomberg Down Bigger blow if virus Jan. 31 5.9% Down 0.2 ppts to 5.7% 5.9% Economics 1.4 ppts to 4.5% extends into 2Q

Standard Down Infection under control Jan. 31 6% Down 0.3 ppts to 5.8% 6.1% Chartered 1.5 ppts to 4.5% sooner than SARS

Down Debt intensive stimulus Goldman Sachs Jan. 31 5.6% Down 0.4 ppts to 5.5% 5.9% 1.6 ppts to 4% expected

Evergrande Jan. 31 4% - 5.0%-5.4%

Down Policy intervention Citi Jan. 29 5.9% Down 0.3 ppts to 5.5% 5.8% 1.1 ppts to 4.8% “critical”

Down materially from Impact “harder than Nomura Jan. 29 5.8% 5.7% 6% pace in 4Q SARS" 2019

Source: Bloomberg, Caixin

8 Outlook

◆ Best-case scenario? Wenhong, head of Shanghai’s medical expert group and director of the -affiliated hospital’s infectious disease department, predicts the best-case scenario would see the virus brought under control within 2-3 months, with the intermediate scenario lasting 6 months to a year.

◆ Back to Work? Beijing is currently set to resume normal work on Feb. 10, and other localities have set similar dates. Prompt resumption of normal production and transportation will be key to limiting losses, so it is worth keeping an eye out for changes to those dates. Some local governments like Xi’an, capital of Shaanxi province, have already moved to further postpone resumption of work to the second half of February.

◆ More rate cuts in train? PBOC advisor Ma Jun expects further reverse repo rate cuts later in the month, and other central bank measures seem likely.

PBOC deputy governor Pan Gongsheng says it is likely that the PBOC will cut the interest rate on medium-term lending facility loans as well as the loan prime rate this month.

◆ What about the targets? Authorities are facing the deadline of a decade, having pledged to ensure the 13th 5-year plan is completed and that the goal of building a ‘moderately well-off society’ is achieved in 2020 as planned. This means they must deliver on doubling GDP from 2010, which will require growth of roughly 6% for 2020. The virus may force policymakers to stimulate aggressively over the course of 2020 to keep growth around 6%.

However, most of China’s provinces are projecting slower economic growth in 2020, underlining a nationwide trend that some expect will result in a tweaking of the formal goal when the legislature meets. Normally, the annual “two sessions” meeting is held in March, but may have to be postponed this year due to the virus.

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