China bets they have beaten the pandemic

In this issue we look at the Chinese GDP numbers for the first quarter of 2020 and also the industrial production numbers for the same period. We also look at decision making and risk perception from the point of the Chinese government.

In the West, there is considerable disbelief in the official Chinese reports of COVID-19 death numbers, which state that there has been 3,200 deaths in Wuhan and 4,600 deaths in the whole country. Media commentators have remarked that this must be low, even in Wuhan, based on information showing that cremation has increased to account for a death rate more than ten times that amount; a Voice of America publication on the 27^th of March estimated that deaths in Wuhan number between 42,000 and 46,800¹.

Dr Derek Scissors of the American Enterprise Institute is an experienced China watcher who is involved in the preparation of the China Beige Book, a detailed analysis of the Chinese economy as it relates to American investors. On the 7^th April 2020, Scissors published an article titled 'Estimating the True Number of Chinese Covid-19 Cases', in which he estimates that, based on his data, there are at least 136,000 dead from coronavirus in China and 2.9 million cases in the country².

Should you believe Derek Scissors' numbers, you would think that there is a considerable risk in re-opening the Chinese economy at this point. However, if you are General Secretary Xi Jinping and you believe the official Chinese numbers then you would now reopen the Chinese economy and accelerate growth as rapidly as possible. That is what appears to be happening in the Chinese economy based on industrial production and GDP numbers.

Should Xi Jinping be right, then the resulting outlook of the Chinese economy is similar to that which has now been published by the International Monetary Fund (IMF). The IMF said that after growth of 6.1% last year, the Chinese economy will grow by 1.2% this year and accelerate to 9.2% in 2021.

Obviously, that's a very bullish outlook. It's particularly bullish when you look at the numbers for Chinese GDP. For the year to the March quarter of 2020 Chinese GDP fell by 6.8% on a year on year basis. The actual quarterly numbers were worse than that. The 6.8% for a year-on-year basis includes a couple of quarters of reasonable growth, about 1.5% each quarter. When we actually look at the first calendar year quarter, the Chinese GDP fell by 9.8%. I don't think there is a number as bad as that until you go back to the data from the 1970s.

Let us look at industrial production to see where that slump in the first quarter really hit. The slump hit particularly in manufacturing which fell by 10.2% in that quarter. It hit a little bit less in high tech manufacturing which only fell 3.8% in the quarter, and mining only fell by 1.7% that quarter. At the end of the quarter, the Chinese administration was attempting to reaccelerate production.

The manufacturing output year on year for the year to March was only down by 1.8%. After locking up the Chinese economy in January and February, the Chinese administration was trying to (from March onwards) rapidly reaccelerate manufacturing in China.

When we look at the sector numbers for industrial production in China, we note that some areas were very badly hit and other areas weren't, in the first quarter. The area which had a great decline in output in the first quarter was the manufacturing of cloth. This fell by 31% for the quarter. Even for the year to March it was still falling by 25%. Cement production fell by 24% for the quarter. Even for the year to the end of the March it was still falling by 18%.

Saloon Car (Sedan) manufacturing has been particularly badly hit with a slump of 48% for the quarter. This was still down 44% for the year to March. SUVs fell by 42% for the quarter and 44% for the year to the end of March. Sectors with a broader measure of demand like electricity fell by 7% in the first quarter, down by 4.6% for the year to March.

The numbers above are really terrible numbers for the broader Chinese economy. However, Australia doesn't export to the broader Chinese economy. Australia primarily exports iron ore to the ferrous metal Industry. When I go through the production numbers for industrial output in China for the first quarter, it turns out that the steel industry was one of the best performers.

The manufacturing of ferrous metals together with smelting and processing was up by 0.5% for the quarter. In March it was growing by 4.1%. We are a lot better off selling to the steel industry in China than selling to the automobile industry in China, as the Germans are.

Some areas of industrial output grew quite rapidly. Perhaps unsurprisingly, manufacture of medicines grew by 10.4% for the year to march. Manufacture of industrial robots grew 13% for the year to March. Maybe those robots are going to be much more useful in Chinese factories...

In China, the perception of risk to the Chinese economy of a resumption of coronavirus is far less than that risk to the Chinese economy is perceived in the west. Should the Chinese leadership be right we will see a rapid reacceleration of the Chinese economy which should absorb all of the loss of output this year. After a 9.8% fall in GDP in Q1 2020 the Chinese economy is assumed to grow by 11% in the only three quarters remaining in 2020. This provides a final result of 1.2% for calendar 2020. The economy is then expected to grow by 9% in 2021.

Should the Chinese leadership be wrong, there may be a significant recurrence of Coronavirus when China gets into winter. This would damage Chinese output in the fourth quarter of 2020 and the first quarter of 2021. Should another wave of infections arrive, then the positive outlook suggested by the IMF is significantly at risk.

We are left with two forecasts: An optimistic outlook of the IMF based on low Coronavirus impact in China and a more pessimistic outlook based on a high impact of Coronavirus, should it return in winter. We will have to wait till the end of winter to find out which forecast is correct.