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China’s Economy Declines for the First Time in Decades

China had to face reality last year after the country’s economic growth rose only marginally for the first time in decades, the world’s second-largest economy now decreased by 6.8 percent in the first three months of this year – which marks the highest value in twenty-eight years.

China’s GDP Down For First Time Since 1992

The government’s statistical office announced the figures on Friday. Accordingly, the gross domestic product decreased in the first quarter compared to the first three months in 2019 by 6.8 percent. It was the first negative value since at least 1992 when China started publishing quarterly growth figures. If this trend continued, it would mark the lowest growth for the People’s Republic since 1976, when the economy grew by only 6.1 percent.

After decades of growth and associated aspirations to become the world’s strongest economy, Chinese companies have falling victim to the pandemic- unsurprisingly, given that government measures in Beijing have virtually shut down the country’s economy since late January. Accordingly, February turned out to be particularly hard on the economy.

Figures Still Show Some Comeback

The trade figures published on Tuesday nevertheless provided encouragement, even if the decline in exports in March was still significant, with a minus of 6.6 percent compared to the previous year. Compared to January and February (- 17.2 percent), the decline was no longer as significant, however. The situation is similar as it pertains to imports. While January and February ended with a minus of 4 percent, the March figures only account for a 0.9 percent deficit. The latter is a result of companies and factories gradually resuming work, which has led to a stabilization of the data.

It moreover indicates that the severe slump of the first quarter is likely to be a temporary phenomenon. The question now is how it will take China before it can bring its growth back to the level it had before the COVID-19 crisis.

Currently, the idea of a complete recovery in the second quarter of the year seems inconceivable. The country’s economic output after the standstill is only slowly picking up again. One reason for the lack of pace is that China, just like anyone, is not impervious to the lack of global demand. Significant domestic demand by itself is unlikely to be sufficient if China seeks to return to the high level of previous years.

Beijing’s Next Steps

It will thus be all the more critical that Beijing utilizes the appropriate measures. The government has already launched a significant number of fiscal and monetary policy actions, with the primary goal being to reduce the tax burden on small and medium-sized companies and simplify their access to capital. Moreover, new infrastructure programs have also been announced, such as, for example, 5G network expansion.

Additionally, the People’s Bank of China, the country’s central bank, will support the population also – including a digital currency program for government employees. Nevertheless, the amount of aid that Beijing has authorized so far is not comparable to the aid packages that the United States or the EU have launched. It is therefore already possible to doubt that the current services are sufficient, especially for small companies.

Whether or not additional aid is provided will become more apparent when China’s People’s Congress comes together for its annual meeting, which, following a COVID-19 cancellation, is now to be held in either May or June.

Much will depend on how efficient the current aid measures work and how the rest of the world manages the post-COVID-19 world. Since China’s aspiration of global hegemony does not match those of ordinary nations, Beijing is likely to make sure its economy accelerates sooner rather than later, albeit the rest of the world will also need to play its part.