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Still Promising
The market expects a strong rebound of the Chinese economy
By Yu Shujun  ·  2020-02-21  ·   Source: Web Exclusive

While the Chinese economy is being slowed down due to the novel coronavirus outbreak, the market is still expecting a sharp recovery, according to Luis Oganes, head of Currencies, Commodities and Emerging Markets Research at U.S. investment bank J.P. Morgan. 

"The market is probably still expecting a V-shape recovery," said Oganes at a briefing in New York on February 19, adding that he got this sense while visiting clients in Europe and other part of the world.

Oganes explained that the market is expecting the major hit from the outbreak to occur in the first quarter, and for it to see a rather strong recovery in the second quarter.

"Obviously, the Chinese administration has adopted some policy support," said Oganes. Fiscal policies like tax concessions have been introduced to support companies that are directly affected by the epidemic.

To stabilize market expectations and boost market confidence, the People's Bank of China released a total of 1.7 trillion yuan ($243 billion) in open market operations on February 3-4. Prior to that, the central bank lowered the reserve requirement ratio by 0.5 percentage point on January 1, injecting 800 billion yuan ($114 billion) worth of liquidity.

The bank also lowered the one-year medium-term lending facility rate from 3.25 percent to 3.15 percent on February 17, and cut the one-year loan prime rate, a new benchmark lending rate introduced in August 2019, from 4.15 percent to 4.05 percent on February 19.

However, Oganes believes "there is an element of complacency and the market may need to basically adjust."

"Maybe instead of a V-shape recovery, it could be a U-shape recovery," he said, adding that the Chinese economy may still have very modest growth in the second quarter and the recovery may not come until the third quarter.

Currently, J.P. Morgan has revised its forecast for China's growth in 2020 from 5.9 to 5.4 percent. Oganes said that they are in a waiting period, trying to incorporate whatever additional information they have in order to fine tune their projections.

Another reason markets in general are not panicking about the outbreak is that "eventually economies do recover, and markets do recover," Oganes said.

"A lot of the psychology of investors—even though we are concerned about how bad the situation can get or when it will hit bottom—is that no one wants to be making a huge bet against the market or getting overly negative," he added.

On whether the epidemic will accelerate the shifting of supply chains from China, which began during trade tensions with the U.S., Oganes said that their clients with a huge manufacturing presence in China would never be able to replace their manufacturing in another country.

Due to trade tensions between China and the U.S., companies are rethinking their supply chain arrangements for the future, and maybe looking for manufacturing facilities in third countries that are not exposed to or subjected to U.S. tariffs so as not to lose competitiveness.

"The reality is that a lot of our corporate clients that have a huge manufacturing presence in China tell us the scale of production that they have in China cannot be easily replicated in other countries without massive investments and without a lot of time spent in the process," Oganes said.

"If you have the risk of U.S. tariffs, you may look to build your factory somewhere else, but you cannot replicate 'China Inc.' easily in these countries. They are smaller, they don't have the skill set, they don't have the resources, the manpower, basically the scale to replace," he said.

He added that if the U.S. imposes tariffs on their products, companies will to need to keep manufacturing in China, pay the tariffs and pass the cost on to the final consumer price. So it will be U.S. consumers paying the higher price because of the tariffs, Oganes said.

(Reporting from New York City)

Copyedited by Rebeca Toledo

Comments to yushujun@bjreview.com 

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