My colleagues at Vilaggazdasag economic daily summed up the basic facts here: GDP downturn, trade relations, supply chain, lost consumption, fear factor.
“The length of the coronavirus epidemic determines the extent of the decline in the Chinese and the world economy. The first domino escapade is expected to be soon in the global supply chain. Most analysts also agree that the biggest problem will be caused by the epidemic in the first three months of the year. Manufacturing, retail and tourism will suffer the relegation, but there will also be winners, such as the pharmaceutical industry.”
More on this here in the Vilaggazdasag:
So far, further issues also to mention:
S&P’s summary considers a loan loss of up to USD 800 billion possible in the Chinese banking system if the health crisis drags on. The entire banking system is worth about USD 41,000 billion. According to the credit rating calculations, the proportion of bad loans may even triple to 6.3 percent. That would mean downgrading loans worth USD 5.6 billion. S&P says the Chinese financial system is less resilient than it seems at first, the capital of some banks should be increased.
According to Ming Tan, S&P’s credit analyst: “Chinese banks are more vulnerable to idiosyncratic risks, arising from governance related issues and risk management deficiency, than systemic ones,” According to Tan, we should expect significant economic effects than SARS for the coronal virus. Although the banking system and the economy are now stronger than it was in 2003, we must also see that the Chinese economy was on an up-and-coming trajectory when the previous outbreak, the SARS broke out.
The Chinese Central Bank (PBoC) last conducted larger-scale stress tests in 2019, in which 5 of the 30 banks included in the study had a common equity tier ratio (CET) below the expected five percent and seven others would fall below six percent. The tests were carried out by the central bank after it had to provide state assistance to three banks for the first time in 20 years: Bashing Bank, Bank of Jinzhou and Hengfeng Bank. Now, according to S&P, Bohai Bank, China Zheshang Bank and Shengjing could be affected if GDP growth slows as a result of the crown virus. Tan warns that poorly performing loans are also sensitive to GDP growth for the big banks, which has already weakened the financial system.
Investors are also concerned about China’s banking system, with Chinese bank shares in Hong Kong falling more than 10 percent since January 10, and the fall was barely dampened by the central bank’s package of measures. But China is trying to do the most in the shortest possible time. A year ago, there was not as much cash coming into the interbank market as it is now, with USD 57 billion in liquidity-tights eased on Tuesday, with an additional 800 billion yuan constantly in the system. In addition to the liquidity-boosting measure, the 7-day and 14-day reverse repo rates were also reduced, by 10 basis points to 2.4 per cent and 2.55 per cent.
S&P analysts expect banks to be invited by Beijing to help maintain social stability. Last month the governing body issued management guidelines on how to handle bad loans and credit card debts or non-payments. Ming Tan said this could be not enough, expecting further interest rate cuts, which would not only reduce repo rates, but would also mitigate the liabilities of banks specifically.
The commodity market was the first to sense the crisis
Several Chinese producers have already reported force majeure, i.e. they cannot accept the ordered and agreed goods. This is daunting considering the proportions:
Will China comply with the trade agreement?
According to Bloomberg news reports, no formal notification has yet been received from the U.S. side that China would not be able to deliver on the January agreement. At the same time, Chinese officials told the news agency that they hoped the United States would agree to handle the commitments with some flexibility. The contract, of course, includes a “vis mayor” clause requiring the two parties to reconcile when a natural disaster or other unforeseeable event occurs. It’s about to continue, I’m afraid.