SINGAPORE (April 13): A couple of weeks ago, Lily, a Shanghainese contact of mine who is in the fashion manufacturing industry, asked if I needed masks. She gave a list of different types of masks she had available, and their prices. The cheapest were surgi-cal masks while N95 masks cost a lot more.
It is not just anecdotal evidence or statistics rolled out by China’s State Council Information Office, but also by updates from companies themselves: China is going back to work, slowly but surely.
According to media reports, China manufactures around 50% of glob-al masks and there is now a short-age. It also makes other PPE or personal protective equipment. As the West is totally immersed in fighting Covid-19, China has stepped up its technological prowess. China is exporting its expertise, helping economies in Europe, Africa and the Middle East to fight Covid. Research for a cure is being stepped up as well. Mainland news agency The Global Times says US agencies are now airlifting medical supplies from China to the US.
Elsewhere, shipyards have gone back to work building state-of-the-art vessels. Mobile phone manufacturer Huawei on March 26 launched the Huawei P40 Pro+ 5G.
With all this economic activity, it should come as no surprise if the Chinese economy rebounds after a moribund January and February. And the signs are all there.
First off, there is the Purchasing Manager’s Index (PMI). For the month of March, both manufacturing and non-manufacturing PMIs surged dramatically and are now above 50, which is in expansion territory. This was significantly above consensus forecast for a rebound to the mid-40s. In March, manufacturing PMI rose 16.3 points to 52 from a record low of 35.7 in February. The non-manufacturing PMI rebounded a sharper 22.7 points to 52.3 in March from record low 29.6 in February.
In a reaction to the rebound, Ho Woei Chen, economist at UOB Global Economics & Markets Research, says “the dramatic surge in March PMIs is less than convincing”. Still, she points out that the key components of the manufacturing PMI including output (54.1 in March vs 27.8 in Feb-ruary), new orders (52.0 vs 29.3) and employment (50.9 vs 31.8) are now in expansion. However, new export orders (46.4 vs 28.7) remained in contraction despite some recovery. “This might be a better gauge of the overall demand condition as supply chain dislocation and demand in other markets are still being affected by the pandemic,” Ho notes in a recent report.
Rebound in property sales
On April 6, CapitaLand announced its sales offices in China for resi-dential property were progressively opened in March. Since the reopening, CapitaLand’s residential sales in March have exceeded RMB1.3 billion ($263 million), more than 5.5 times the value recorded in January and February combined. On March 24, CapitaLand launched the La Botanica township in Xi’an. All 288 units for sale were sold out within four days of the launch.
Outside Xi’an, CapitaLand’s sales offices across its five core city clusters — around Shanghai and its environs, Beijing and Tianjin, Guangzhou and Shenzhen, Chengdu and Chongqing, and Wuhan — have also reported healthy sales figures since reopening.
As at end March, about 80% of the stores in CapitaLand malls in China are in operation. The group’s four malls in Wuhan — which were shut since the end of January — reopened on April 2 after receiving the necessary clearance from local authorities.
On the commercial front, about 95% of CapitaLand’s office tenants have resumed operations and more than 65% of their employees have returned to office. About 80% of the tenants in CapitaLand’s business parks have also resumed operations.
CapitaLand Retail China Trust says that its portfolio observed improving business activities In March compared to during the peak of Ch-na’s lockdown measures in February 2020. Tenants’ opening rate has been steadily increasing and reached as high as 80% to 90% in some malls by the end of March. Footfall for March 2020 has also rebounded positive-ly from the preceding month’s low.
PBoC injects liquidity
On April 3, the People’s Bank of China (PBoC) announced a lowering of interest on excess reserves (IOER) from 0.72% to 0.35% and a reduction of banks reserve requirement ratio (RRR) by 100 basis points. It was the third RRR reduction this year and is targeted at small and medium-sized banks to support SMEs.
The move releases RMB400 billion into the financial system, according to PBoC’s statement. The first 50bps reduction will take place on April 15, followed by the second one on May 15. The resultant RRR will fall to 6% for about 4,000 small and me-dium-sized banks (including rural credit cooperatives, rural banks, village banks and city banks which only operate in the region where they are registered).
This means that on average, each qualified bank will have an additional RMB100 million of lending capacity over the next one month to support local enterprises’ work and production resumption, says Suan Teck Kin, head of research at UOB Global Markets & Economics Research.
The targeted RRR cuts are to help especially companies in the agricultural and external trade sectors and to lower borrowing costs for smaller companies, Suan adds. The State Council meeting also ap-proved an increase of RMB1 trillion in re-lending and re-discount quotas to banks, to provide more low-cost funds for them to lend to small businesses. The lowering of IOER is the first reduction since 2008, and the mag-nitude is also larger compared to the 27bps move in Nov 2008, Suan in-dicates. In Nov 2008, the IOER was lowered to 0.72 bps from 0.99 bps. “Faced with lower interest rates paid on excess reserves, banks will become more inclined to lend out the funds, rather than park it at the cen-tral bank,” Suan reasons. The three RRR cuts this year are likely to release RMB1.8 trillion into the economy. This is only slightly larger than the RMB1.6 trillion released in the two RRR reductions last year, in Jan and Sept 2019 in response to the US-China trade war.
A tenuous recovery
According to the State Council Infor-mation Office, large-scale enterprises in China achieved an average work resumption rate of more than 98.6% on March 30, with about 89.9% of workers reporting back to work.
In the SME segment, work resumption rate is lagging at about 76%. On March 31, the State Council said sales revenue of Chinese enterprises is gradually returning to pre-Covid levels, and are at around 81% of that achieved in 2019; consumer oriented businesses such as supermarkets and convenience stores are seeing revenue returning to nearly 98% of the level seen in 2019.
Unfortunately for the environment, average daily coal consumption by six major electricity producers in March was 90% of the level of the past three years. March traffic congestion index for 100 cities and real estate transactions, are around 90% of the level seen during the same period in 2019.
Suan of UOB expects the Chinese economy to contract 3.4% in 1Q2020 but rebound to 5.7% y-o-y growth in 2Q2020. China will release its GDP figures on April 17.
For all the upbeat statistics, concerns abound with the still tenuous Chinese recovery. With Covid spreading in Europe and the US, and a sharp acceleration in cases in Singapore, the fear in China is of a second-round effect from imported cases.
This is probably why the Chinese government has not unleashed a stimulus in the pro-portion as that in the US. The US Federal Reserve’s quantitative easing alone is believed to amount to US$9 trillion ($12.9 trillion) compared to US GDP of around US$21 trillion. This excludes the US$2 trillion stimulus passed by Congress and signed into law on March 28.
As the rest of the world hunkers down in an effort to defeat Covid, the US Centre for Disease Control and the World Health Organization are recommending everyone should wear a mask. No surprise then that Lily’s business has picked up, much like the rest of China.
