CAIXIN GLOBAL INTELLIGENCE CORONAVIRUS 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 infection after virus breaks species barrier in Wuhan Wuhan health commission acknowledges "mysterious pneumonia" 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 Zhong Nanshan Huanan Seafood Wholesale Market closed; Wuhan police punishes eight doctors for "spreading Jan.01 rumors" about virus 41 patients in Wuhan confirmed to 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 case outside of China Jan.19 China confirms first cases outside of Wuhan Zhong Nanshan reveals person-to-person transmission; Premier Li Keqiang 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 announce quarantine of Wuhan effective the next day; North Korea 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 of human transmission outside China; almost all cities in Hubei 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 Infections 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. has declared 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 institutions not 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 Peking University 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 redline if 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.