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    1. Chinese GDP in Recession amid Virus Outbreak

    Chinese GDP in Recession amid Virus Outbreak

    20/04/2020

    Chaoping Zhu

    Amid the COVID-19 global outbreak, China reported negative year-over-year growth of GDP for the first time since 1992, when the National Bureau of Statistics started to release economic growth numbers on a quarterly basis. The real GDP growth declined 6.8% year-over-year, worse than market expectation. Among sectors, the industrial sector was hit most seriously as a result of production suspension, with a year-over-year decline of 9.6% in sector value-add. Meanwhile, a 5.2% decrease was reported in value-add of service industry due to lockdown measures.

    Despite the dim GDP numbers, economic activities have been on track for normalization since early March. Improvements are seen in the monthly indicators including industrial production, retail sales (consumption) and fixed asset investment. 

    Negative growth reported in 1Q, with signs of improvement in March
    EXHIBIT 1: CHINA ECONOMIC ACTIVITIES

    Source: China National Bureau of Statistics, Wind, J.P. Morgan Asset Management. Data reflect most recently available as of 20/04/20.

    Looking forward, we expect to see low single-digit GDP growth on a year-over-year basis in the upcoming quarters as domestic economic activities largely resume. The recovery trajectory will be largely driven by developments in the global pandemic and control measures adopted by each country. At this stage, we remain cautious about the prospects for a V-shaped recovery on a year-over-year basis in China in 2Q 2020, since external demand might remain weak as a result of lockdown measures in the United States and Europe. Meanwhile, to prevent a potential second outbreak, partial social distancing measures are being maintained, which continue to weigh on parts of services sectors. For instance, sports events and cinema chains might remain closed until May. That said, upside risk also exists in medicine development. Potential breakthroughs in treatment might trigger the removal of lockdown measures in the rest of the world and a quick economic recovery.

    In terms of policies, the Chinese government is on the track of a gradual escalation in its stimulus policies. On April 15, the People’s Bank of China (PBoC) cut the rate for its 1-year medium-term lending facility (MLF) by 20 bps, which was the second cut since the beginning of this year, bringing down the rate below 3%. Following that, the loan prime rates (LPR) for 1-year and 5-year were lowered by 20 and 10 bps respectively on April 20. As shown in Exhibit 2, the social financing data released earlier also points to acceleration in loan issuance by banks and bond financing by the government sector. Supported by the loosening liquidity condition, government-led investment might stabilize and mitigate the downside risk on the demand side.

    Financial condition keeps improving
    EXHIBIT 2: TOTAL SOCIAL FINANCING
    RMB BILLION

    Source: People’s Bank of China, Wind, J.P. Morgan Asset Management. Data reflect most recently available as of 20/04/20.

    Given the high uncertainties in the global economy, the Chinese authority might tolerate a lower growth rate this year. A specific growth target might not be set as usual during the annual session of the National People’s Congress, which is delayed and likely to be convened in May. Instead, stability in employment might become the top policy priority for this year. Against this background, the PBoC might continue to follow a data-driven approach in its policies, and have further cuts to policy rates and required reserve ratio when economic data reveal a worsening outlook.

    Investment implications

    As the uncertainties are sustained in the global and local economy, it is essential for investors to keep a diversified and balanced portfolio. In the fixed income market, Chinese government and quasi-government bonds might benefit from the continuous policy easing. The relatively high yields compared with zero yields in developed markets might also help boost the demand for onshore bond market. In equities, current low valuations in A-share and Hong Kong stocks imply opportunities for long-term investors. Meanwhile, quality names in the internet services, health care and consumer staples sectors might see improvements in their performance during the lockdown. 

    The Market Insights program provides comprehensive data and commentary on global markets without reference to products. Designed as a tool to help clients understand the markets and support investment decision-making, the program explores the implications of current economic data and changing market conditions. 

    For the purposes of MiFID II, the JPM Market Insights and Portfolio Insights programs are marketing communications and are not in scope for any MiFID II / MiFIR requirements specifically related to investment research. Furthermore, the J.P. Morgan Asset Management Market Insights and Portfolio Insights programs, as non-independent research, have not been prepared in accordance with legal requirements designed to promote the independence of investment research, nor are they subject to any prohibition on dealing ahead of the dissemination of investment research.

    This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature or other purpose in any jurisdiction, nor is it a commitment from J.P. Morgan Asset Management or any of its subsidiaries to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical and for illustration purposes only. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and determine, together with their own financial professional, if any investment mentioned herein is believed to be appropriate to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results.

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    In the United States, by J.P. Morgan Investment Management Inc. or J.P. Morgan Alternative Asset Management, Inc., both regulated by the Securities and Exchange Commission; in Latin America, for intended recipients’ use only, by local J.P. Morgan entities, as the case may be. In Canada, for institutional clients’ use only, by JPMorgan Asset Management (Canada) Inc., which is a registered Portfolio Manager and Exempt Market Dealer in all Canadian provinces and territories except the Yukon and is also registered as an Investment Fund Manager in British Columbia, Ontario, Quebec and Newfoundland and Labrador. In the United Kingdom, by JPMorgan Asset Management (UK) Limited, which is authorized and regulated by the Financial Conduct Authority; in other European jurisdictions, by JPMorgan Asset Management (Europe) S.à r.l. In Asia Pacific (“APAC”), by the following issuing entities and in the respective jurisdictions in which they are primarily regulated: JPMorgan Asset Management (Asia Pacific) Limited, or JPMorgan Funds (Asia) Limited, or JPMorgan Asset Management Real Assets (Asia) Limited, each of which is regulated by the Securities and Futures Commission of Hong Kong; JPMorgan Asset Management (Singapore) Limited (Co. Reg. No. 197601586K), this advertisement or publication has not been reviewed by the Monetary Authority of Singapore; JPMorgan Asset Management (Taiwan) Limited; JPMorgan Asset Management (Japan) Limited, which is a member of the Investment Trusts Association, Japan, the Japan Investment Advisers Association, Type II Financial Instruments Firms Association and the Japan Securities Dealers Association and is regulated by the Financial Services Agency (registration number “Kanto Local Finance Bureau (Financial Instruments Firm) No. 330”); in Australia, to wholesale clients only as defined in section 761A and 761G of the Corporations Act 2001 (Commonwealth), by JPMorgan Asset Management (Australia) Limited (ABN 55143832080) (AFSL 376919). For all other markets in APAC, to intended recipients only.

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