Chinese Economy In Severe Threat

The outbreak of coronavirus this year has had a devastating impact across the globe, inflicting severe human and economic damage.

In China, the place where the virus originated, the economic situation is drawing great attention and concern.

China suffered the first economic hit from the virus as its government rushed to address the situation by announcing widespread shutdowns and travel restrictions in order to stop the spread of the virus.

Chinese Economic Indicators Plummeting

With factories and offices around the country closed for weeks, the economic toll became clear in the first economic data released for February.

The manufacturing sector fell to its lowest level on record over February as a result of the drop-in activity. The industrial output reading highlighted weakness too, falling 13.5% over January and February.

The economic toll of COVID-19 in China has been widespread. Retail sales have fallen 20.5% across the first two months of the year. Fixed asset investment has also fallen by 24.5% over the first two months of the year. Services production has also suffered, falling 13% over January and February.

The overall performance of the Chinese economy, or rather underperformance, is now a major source of concern. With a nominal GDP of $14.14 trillion, China is the second-largest economy in the world, behind America only.

Furthermore, measured on a purchasing power parity basis, it is the largest economy with a GDP of $27.31 trillion. As of last year, China contributed nearly 17% to the global economy.

Fitch Predicts China GDP Slump

With these figures in mind, expectations of a severe drop in Chinese GDP pose a serious threat to the health of the global economy.

Rating agency Fitch estimates that China will suffer a 4% fall in GDP over Q1. Chinese GDP was already weak coming into Q1 on the back of the two-year-long trade war between itself and the US which saw GDP falling to 6.1% in the final quarter of 2019, its lowest level for 30 years.

Incoming Chinese data will now draw much more trader focus and pose a much greater risk of volatility. Signs of further weakness are likely to weigh heavily on risk sentiment and also put further pressure on President Trump to roll back many of the tariffs and restrictions which are still in place on as much as $375 billion of Chinese goods entering the US annually.

Shanghai Composite Holds Above Key Support Level

The Shanghai Composite has fallen 15% over the year (highs to lows) but has found demand just ahead of the 2634.42 support level. For now, price remains within a broader descending triangle pattern, which keeps the bias bearish for now. If price breaks down below the 2634.42 level, the 2442.82 level is the next support level to watch.