17 April 2020 by jbchevrel
China GDP printed at -6.8% in Q1. There had been no contraction in China after the Tiananmen Square crackdown, the SARS epidemic and the GFC. As we acknowledge that this is backward-looking, it is fair to say that the CDS market appear optimistic about a quick recovery in China. Indeed, China 5y CDS has tightened from mid90s the week before the roll to about 40bp this week. China seems to have had an initial success in containing COVID-19. The tightening paused this week, despite peers’ moves, as China still faces two challenges: collapsing external demand due to the pandemic and the rising threat of a second wave of COVID-19 infections imported from abroad. The CCP’s Politburo convened today, focused on that dual risk. According to the notice that was issued shortly after the meeting, the Politburo pledged to step up policy stimulus to offset COVID-19 impact. The Politburo has vowed to secure 6 targets: employment, livelihood, survivorship of enterprises, food & energy safety, supply chain functioning and local governments operations. The Politburo did not issue any guidance with regards to securing a certain pace of GDP growth target. On the fiscal side of the equation, the Politburo clearly said it would raise the fiscal deficit ratio, issue central government special bonds (CGSBs), and increase the quota of local government special bonds (LGSBs). On the monetary side of the equation, the Politburo stated that it will use the reserve requirement ratio (RRR) cuts, rate cuts and re-lending to maintain abundant liquidity and cut effective loan rates.