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COVID-19 Pandemic Rattles Chinese Economy

calendar 20/04/2020 - 04:28 UTC

COVID-19, the virus pandemic that started in Wuhan, China, in November 2019, became a global health crisis in a matter of weeks. Almost immediately after the virus began to gain prominence, measures were taken to curb the spread of the virus that ended up affecting the lives of millions of Chinese. Masses of people were placed under quarantine. Those who were able to, were encouraged to work from home, while the millions that weren’t - factory workers, for example - found themselves out of work as their places of employment were temporarily shut down.

Needless to say, it didn’t take long before the effects of COVID-19 began to impact China's financial situation, causing historic changes for the world’s second largest economy. January and February 2020 were two of the worst months, as industrial production plummeted 13.5% (the historical worst) and retail sales fell 20.5% against the previous year. That, of course, included factories for some of the world’s biggest tech companies, like Apple and Tesla. Also at this time, the virus began to spread across international borders to Europe and the United States, causing both major cities and financial markets around the world to come to a screeching halt as they faced up to the prospect of an unprecedented situation.

In the following iFOREX news article, we’ll lay out the effects the COVID-19 pandemic has had on the Chinese economy, from the performance of stocks to its overall impact on the financial markets and what we might expect next.

6% shrinkage is worst in 50 yearsOne question many investors ask is "how bad is it?". The truth is we just don’t know yet. Every day brings more news, not just from the Chinese markets but from all over the world, detailing the immense financial toll the COVID-19 pandemic has and continues to cause. However, from a high-level economic perspective, analysts have estimated that the $14 trillion Chinese economy will shrink by approximately 6% in the first quarter when compared to 2019 - the worst such performance in 50 years. The shrinkage could is described as being due to the detrimental combination of reduced production, cutbacks on investments and a massive dip in retail sales.Bank of China steps in to helpWith millions either sick with the virus, out of work, or both, the task of setting the country on the road to economic recovery begins and ends with the Chinese government, which began to introduce relief compensation packages in early March, intending to dampen the economic impact by lessening taxes, encouraging government spending, and ensuring the protection of jobs. The People’s Bank of China also introduced 100 billion yuan (roughly €13 billion) into the financial system, while providing banks with cheap loans and tightening the amounts banks are able to hold in their reserves.At this point, many familiar with the devastating effects of the 2008 financial crisis on stocks and the financial markets worldwide wondered if the People’s Bank might create a stimulus package in a manner similar to what other countries such as France and the United States have done — but, at this point, it doesn’t look very likely.The worst may be over for ChinaAs the first country to bear the brunt of the COVID-19 pandemic, China also seems to be the first to show plausible signs of recovery. While in late March western countries like the UK and the US braced for the pandemic, China actually began to show an increase in economic growth, as COVID-19 restrictions were eased and companies started to return to work. The Chinese composite PMI, which traces the activity of the service and manufacturing sectors, reported a surge from 28.9 points reported in February to a whopping 53 by the 31st of March - which was more than analysts expected. Also, several Chinese manufacturers reported a PMI reading rise in new export orders, from 28.7 points in February to 46.4 on March 31st, fuelling further optimism. However, these same analysts remain wary, as this recent activity doesn’t suggest China’s economy is entirely back on track.What to expect

The good news is that if China’s manufacturing industry can get up and running normally, that might help to restore broken supply chains that connect it to the rest of the world and start stimulating economic growth. However, with the pandemic still to peak in places like Europe and the US - two of China’s top trading partners - there’s no telling what demand on their side might look like.And that’s where many economists and financial analysts around the world find themselves, waiting and watching because even though the markets are unpredictable on a regular trading day, they're even more volatile in the midst of a global pandemic. All investors and those who are financially-minded can do is stay up-to-date by getting the latest news from sites like iFOREX, where you’ll find more informative articles like this one. At iFOREX, you'll gain a deeper insight into the market with access to a variety of trading tools, , economic calendars and market signals. Joining iFOREX also gives you the opportunity to receive free educational materials, as well as 1-on-1 training with a live coach, who can help explain the various ways to spot opportunities in today’s exceptionally volatile financial markets. 

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