Beijing’s new Covid-19 outbreak

CHINA FINANCIAL - Report 29 Jun 2020 by Michael Pettis

Special points to highlight in this issue:
• China’s gradual economic recovery from the ravages of the Covid-19 pandemic was interrupted two weeks ago by reports of a new outbreak in Beijing. I have no especial expertise in epidemiology, but given the extent of Beijing’s reaction, I do not expect this resurgence to last long.
• Still, it would be foolish to think that the resurgence has not had a profound psychological impact on Chinese households, and thus on the revival of consumer spending. The news on the consumption front was not good two weeks ago, before the new outbreak. I expect it will deteriorate further.
• While China (and the world) is suffering from a much bigger Covid-19-related demand-side collapse than a supply-side breakdown, Beijing has been very unsuccessful in designing and implementing demand-side reforms, and seems to be resorting to the supply-side policies it has always employed the past. This will almost certainly ensure that China’s limited demand rebalancing will be reversed.
• The result must be either a surge in China’s trade surplus, which the rest of the world might not be willing to accept, or a surge in non-productive state-sector investment, which Beijing’s economic policy advisors will not want to accept.
• China will continue to be eager to accommodate portfolio inflows. This makes China’s government bond market still very attractive.

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