Update Country Report Maldives 13 Jul 2020

Data released on July 16th are set to show China's economy returned to growth in the second quarter of the year. This will mark an impressive turnaround from January-March, when measures introduced to contain the coronavirus (Covid-19) outbreak that originated in the central Chinese city of Wuhan caused real GDP to slump by 6.8%, year on year. We estimate that real GDP rose by 3% in April-June, still far below the pre-coronavirus trend rate, but equating to impressive growth in quarter-on-quarter terms, of 12.2%. Other countries in Asia and globally that implemented lockdown policies will struggle to replicate this rebound.

Economic resilience and risks in China

China's economic resilience stems from several factors. Firstly, its containment and public health measures were stringent and enforced relatively effectively, at least once the virus became public knowledge in late January. This allowed most of the country, outside Wuhan, to avoid a lengthy lockdown. The return to workplaces began from mid-February. Second, the country's industrial sector has been insulated because of its critical role in the global supply chain for products for which demand has firmed during the pandemic, such as medical equipment and supplies, as well as technology goods. Despite a collapse in external demand, China's exports performed reasonably well in April-June. Third, the state's powerful role in the economy has facilitated economic normalisation, both in terms of steps taken to ease supply constraints, such as encouraging the return to work, and in boosting domestic demand.

Nevertheless, scepticism will likely surround the numbers when they are published, as it always (and to some extent justifiably) does with China. There are grounds for concern. The strong industrial value-added (IVA) data for April and May, the main factor shaping our estimate for the second quarter, were more upbeat than higher frequency indicators that also track the industrial sector, such as daily coal consumption. Whether this represents artificial inflation or technical deficiencies in the calculation of real IVA is unclear. On the whole, however, we believe that most evidence suggests China's economy grew modestly over the period.

Looking ahead, economic activity in China has been brisk at the beginning of the third quarter. Purchasing managers' indices (PMI) for June suggested the economic recovery is gathering steam, with a notable jump in services indicators suggesting a bounceback in consumption. The suppression of a potential second wave of infections in the national capital, Beijing, has bolstered confidence in the ability of the authorities to manage further outbreaks. The property and stockmarkets are also seeing strong activity, with the latter having moved into a technical bull market. We share the view that China's economic recovery will grip more firmly, with annual growth currently pegged at 4.1% in the third quarter and 5.3% in the fourth quarter.

Nevertheless, we think economic optimism will weaken later in the year. With inflationary pressures building and the current scale of liquidity injections risking inflating asset-price bubbles, the authorities will have to dial back stimulus measures. As they do, the job losses and bankruptcies caused by the coronavirus will become more apparent. Unemployment indicators showed few signs of improvement, even in the otherwise rosy recent PMI data. A more conservative policy stance will cause sequential growth to moderate sharply in the first quarter of 2021, although a low base of comparison will flatter the year-on-year growth rate.

Coronavirus resurgence in Hong Kong and Japan

In the week starting July 5th, 16 economies in Asia recorded a larger increase in new coronavirus infections than for the previous seven days, compared to 13 countries the previous week. The largest increases were recorded in India, the Philippines, Indonesia and Pakistan.

Japan and Hong Kong both saw a resurgence in cases in July 5th-11th. Almost 2000 new infections were recorded in Japan that week, bringing the national total to over 21,000 cases. Since the country lifted its national state of emergency on May 25th, social distancing and other epidemic control measures have been relaxed, and this has caused an uptick in transmission. Tokyo reported another 206 cases on July 6th, marking a record consecutive four days with over 200 new cases. To date, the large majority of Japan's cases have been in the national capital, Tokyo and surrounding prefectures, meaning that the rest of the country has been relatively unaffected. However, there was also an increase in cases in the western city of Osaka in the week starting July 5th, raising concerns about a new cluster.

Meanwhile, in Hong Kong, 173 new infections were discovered in July 5th-11th, in the city's largest wave of new cases since March. Unlike in March, however, the disease has begun to spread in the local community, including in public housing, restaurants and an elderly-care home, making it difficult for the authorities to trace the chain of transmission. In response, officials have reinstated social distancing requirements and, on July 7th, closed schools, bringing forward the summer holiday.

On July 10th the WHO announced that it had deployed to China two experts to begin preparations for an investigation into the origins of the coronavirus. The experts will work with Chinese scientists to agree on the scope and timeline of the investigation. The announcement comes after calls from multiple countries for a third-party probe into the origins of the disease. There will be concerns among the international community about whether China will fully share its records. We expect the inquiry ultimately to fall short of other countries' expectations.

The week ahead

The resumption of parliamentary debate on July 13th in Malaysia, after a seven-month hiatus, will be a highlight for Asian politics this week. The session will indicate whether the Perikatan Nasional (PN) coalition under the prime minister since March, Muhyiddin Yassin, can command a majority and succeed in passing a vote to replace the parliamentary speaker (who was appointed by the former governing Pakatan Harapan pact). We believe that Mr Muhyiddin, helped by a passable response to the pandemic, will at least see off attempts from a (divided) opposition to unseat him. Nevertheless, a snap election later this year or early in 2021 seems increasingly probable, with the prime minister still lacking an electoral mandate.

On the economic front, we do not expect policy changes to be announced by central banks in South Korea and Japan at their monetary policy meetings this week. Bank Indonesia (BI, the Indonesian central bank) will opt for a further 25-basis-point cut at either its meeting this week or next month, we believe, assisted by the rupiah's recent stability. Otherwise, the week will see external trade data covering June released for China, India, Indonesia and Singapore. On July 14th Singapore will also be releasing GDP data for the second quarter of the year, which will likely add to a pessimistic mood in government after the ruling party's underwhelming showing in the recent election.