World Economy Watches and Waits for China's Great Reboot

In any normal year, China’s political class would be convening around now inside Beijing’s Great Hall of the People to rubber-stamp the year’s targets for economic growth and the policies to make it happen.

Instead, the Chinese capital is hushed. Large gatherings are called off as the nation and the rest of the world grapple with the coronavirus that’s killed thousands and stopped output in China and is now spreading on multiple continents.

The inability of officials to meet, however, is not the only reason China is yet to unveil a comprehensive plan to reboot the world’s second-largest economy as the virus sends it tumbling toward a practically unheard-of quarterly contraction.

While still fighting a health emergency, President Xi Jinping’s government now also has to decide how much to spend and on what, mindful of the risks long posed by a large debt burden and the declining usefulness of yet more new roads and railways. Much will also depend on whether it wants to preserve the growth target of “about 6%” it was originally expected to set within the Great Hall.

If it does keep aiming high then a scale of stimulus not seen since the 4 trillion yuan ($577 billion) wave after the Great Recession will be required. That would likely help support slumping global growth too.

For now, the wait-and-see approach is being fed by government statistics indicating that the epidemic itself is being brought under control, which may save Beijing the need to spend big.

“The government has not brought out the big stimulus guns, because they want to wait to see the extent to which activity can recover on its own,” said Andy Rothman, a former U.S. diplomat in Beijing who’s now an investment strategist at Matthews Asia.

In Hubei province, the epicenter of the virus outbreak, new cases have been gradually trending down to an average of less than 150 per day last week compared to above 400 the week before. Fresh cases elsewhere have slowed to a trickle with most provinces reporting no new cases in consecutive days and only sporadic infections.

That development is comforting believers in an imminent ‘v-shaped’ recovery. Shares in Merck KGaA surged last week after the company said the impact of the virus will probably subside in the second quarter, and shave only 1% from revenue.

Yet anecdotal reports from across China’s vast east-coast manufacturing heartland suggest much of the nation’s industrial capacity remains idle or is running at less than full capacity. Amid curbs on transport and strict anti-virus measures, the ‘resumption rate’ remains somewhere around 80% or lower.