SINGAPORE (Mar 20): China has reduced the contagion practically to zero with the drastic measures it adopted and now the workers returning to their jobs (except in Hubei, the most affected province). Is the worst over?
It’s good news that after almost two months of containment the number of contagious people is down. But a recent analysis on the Covid-19 epidemic suggests that the virus is still persistent. We’ve seen that in February the Chinese production dropped dramatically. The industrial production index was up 6.9% in December on a y-o-y basis and was down -13.5% in February. This has already had a considerable impact on the Chinese production process. In February, surveys on the manufacturing sector noted that suppliers’ delivery times indices were high everywhere in the world notably in China. This means that sectors will not go at the same speed of adjustment and the recovery will be delayed.
Is it going to be possible to see a V-shape recovery in China? Or rather a U-shape?
A V-shape doesn’t seem possible as there are a lot of interactions between China and the rest of the world. We had the “V” profile for the SARS crisis in 2002/2003 because China was not integrated in the world economy. This has deeply changed as China is now the biggest world exporter and just below the US for imports. In 2002/2003, it was just a Chinese health issue but in 2020 it is a world health issue coupled with a brutal global economic slowdown. The negative impulse to the world economy coming from China will have a negative impact on markets in the US, Europe and elsewhere. This is the interdependence.
But a U-shape would suggest that after a long period of stagnation, the economy can recover rapidly. If I can have a favourite profile it would be an open “V” which shows a strong negative shock at the beginning, a persistent negative effect and a smooth recovery.
What sequels could remain for the Chinese economy and markets?
The Chinese economy was on a structural downside adjustment. The economy was in transition from an industrial led growth economy to a service led growth economy. This means lower growth rate than we earlier had in mind.
It will drop from 10% in the past to 4% in the foreseeable future. It may have two types of consequences. Firstly, the government will want to increase the Chinese advantage in terms of technology and biotechnology. It will also want to immune the Chinese economy from any negative shock in the future. Secondly, many non-Chinese companies will want to reallocate their investments in China — they will continue to invest in Asia but with more diversity.
Is China now the hope for the West?
It will still be the case as China remains a strong source of impulse in the very large and very dynamic Asian market. No other emerging countries or regions create this type of opportunity.
What lessons can the investor draw from what has happened in China?
For companies, the main lesson is on the concentration of investment and the lack of diversification. But this kind of event is also rare. It will not come back for many years and in the interval the business will develop rapidly. But China may not be the country that will pay the highest price in this crisis — it could be Europe.
Philippe Waechter is Chief Economist at Ostrum Asset Management
