China gets back to work

In a March 16 report, UOB Global Economic and Market Research is expecting the Chinese economy to shrink by 3.4% y-o-y in 1Q2020 and Citi is forecasting a contraction of 5.2% y-o-y in China for the same period.

So far though, China’s economic numbers are terrible. Investments, retail sales and industrial production all plunged in the Jan–Feb period. Citi economists say these numbers “hugely missed expectations”. Retail sales declined by 20.5% y-o-y, below market expectations and a huge swing from an 8% y-o-y growth for all of 2019. Online sales of goods, accounting for 21.5% of total sales, still recorded a growth of 3.0% y-o-y versus 19.5% y-o-y growth in 2019. Sales of grain & food, beverage and medicine rose 9.7%, 3.1% and 0.2% y-o-y respectively in January and February this year.

All other retail components saw sales declines; catering revenue at –43.1% y-o-y, gold & jewellery (–41.1%), automobile (–37.0%), furniture (–33.5%), clothing & textile (–30.9%), construction & decoration materials (–30.5%) and home appliance (–30.0%).

According to Aidan Yao, senior Emerging Asia economist at AXA Investment Managers, sales of large-ticket items, such as cars, home appliances and furniture reflect “meagre activities in the housing market, where real-estate transactions grounded to a halt due to local governments’ tough control on human activi-ties to slow the spread of the virus”.

According to the National Bureau of Statistics, national property sales volume de-clined by 39.9% y-o-y in the first two months of the year. Construction activities fell by 44.9% y-o-y in January and February and real estate investment fell 16.3% y-o-y for the same period. In the base case scenario which China experienced in January and February, Citi is fore-casting FY2020 growth at 3.7%, and UOB is expecting full year growth of 4.1%.

Slow revival begins

However, China is seeing the beginnings of a gradual return to normality. For instance, the return rate of Lunar New Year travellers picked up from 53.3% on March 7 to 63.2% as of March 14. Total passenger traffic was still down 63.3% y-o-y on Mar 14, but it represented an improvement week-on-week.

Overall highway traffic including freight transport is almost normal with intra-city road traffic in Tier-1 cities in the March 7–14 period at 82.4% as busy as in the same period in 2019.

Coal consumption by power plants in the March 7–14 period was 78.7% of the lev-el for the same period last year. And the resumption of work rate reached above 95% for big industrial enterprises and around 60% for SMEs as of last week, although the production capacity has yet to normalise.

“Chinese authorities are doing this at a very gradual pace and local governments are ensuring that no new cases develop as workers go back to factories in other provinces. The Chinese are getting back to work in a very controlled manner and the slow paced activity contributes to the negative numbers we’re seeing,” says Suan Teck Kin, head of research at UOB Global Economic and Market Research.

“Looking ahead, consumer spending growth is expected to rebound due to pent-up demand,” Yao says. Although Chinese unemployment has risen to 6.2% in Febru-ary 2020 from 5.2% in December 2019, the Chinese government is likely to ensure suf-ficient policy support to keep unemployment at bay, he adds. In any case, however, the economy seems to be bottoming out, as domestic outbreaks, even in the epicentre of Hubei province, have basically come under control and economic activities are beginning to recover. Bank of America points out that during March 9–13, 2020, China’s manufacturing and construction sectors continued to ramp up their capacity, and traffic picked up fur-ther. Government data suggested that 80% of workers have returned, with the ratio of 93% for delivery services.

Room to boost

On March 13, 2020, the People’s Bank of Chi-na (PBoC) announced a 50bps reduction of banks’ reserve requirement ratio (RRR) to 100bps for all banks that meet the criteria for lending to SMEs and private companies under its inclusive finance programme, effective from March 16. Qualified joint-stock banks will get an additional 100bps reduc-tion in their RRR.

According to PBoC’s statement, the target-ed RRR reduction will release an estimated RMB550 billion ($112 billion) for long-term lending. Of this, RMB400 billion will come from reductions related to the inclusive finance programme and RMB150 billion will stem from cuts for qualified joint-stock commercial banks.

Government policy is expected to continue to further support SMEs in the current recovery drive by lowering financing costs and ensuring the availability of credit. “This is es-pecially important as the Covid-19 outbreak in Europe and the US continues unabated, which will have a significant impact on the demand side of the equation,” UOB says.

Demand shock from global economy

China is not out of the woods. The initial sup-ply shock impact of Covid-19 was to disrupt the global supply chain — including iPhones, Sam-sung products, the auto sector and garments. “This supply shock has now been exacerbat-ed by a demand shock as consumers alter their behaviour in response to the virus threat,” says The Capital Group in an update on March 16. In the UK and across Europe, football — which is a multi-billion euro business — match-es have been postponed or cancelled. In the horse-racing calendar, the Grand National, a steeplechase, has been postponed. In the US, NBA, major league baseball, and the Kentucky Derby have all been postponed. “The worsening of the outbreak in other countries could further drag China’s recovery in 2Q2020 via both trade and supply-chain channels,” Citi says in an update on March 16.

The downside according to Citi is a global recession, triggered by a sudden stop of eco-nomic activities created by quarantines and social-distancing measures around the world. During the GFC in 2009, China’s exports growth tumbled to as low as -26.5% y-o-y and remained deeply negative for nearly one year, Citi recalls. “Although the share of exports in China’s GDP has lowered from 31.4% in 2008 to 17.4% in 2019, the spillback effect of ‘out-side outbreaks’ on the tradable sectors can still be quite significant. The possible disruptions to global supply chains would also drag the recovery of China’s manufacturing activities. In addition, with more imported cases, China still faces a non-trivial risk of second-wave outbreaks of Covid-19,” Citi warns.

Additionally, globally, people have stopped travelling with an increasing number of travel bans. As a result, airlines have had to cancel flights and nobody dares book a cruise, causing a demand shock for the cruise business.

“We are also seeing increasing escalation of travel bans, including the most recent decision by the US government to restrict flights from 26 European countries into the US. The impact of these measures will be felt more broadly than in the obviously affected airline and cruise sectors, and among similar service providers — but at the same time the global economy has a greater weighting to these sectors than in the past,” the Capital Group says in a March 16 update.

Nonetheless, economists are expecting a “sequential” rebound in the Chinese economy in 2Q2020, and some y-o-y growth in 2H2020. UOB is forecasting 6.5% y-o-y growth in 2H2020 as the Chinese juggernaut resumes its expansion albeit at a much slower pace.