As China appears to recover from the the effects of the COVID-19 pandemic, our contacts on the ground provide insight into what this looks like for business.
The epicentre of what is now a global pandemic has shifted to Europe, it could potentially shift again to the US, and the global economy continues to reel from the impact of countries all over the world imposing varying degrees of a lockdown.
China implemented drastic measures and the largest quarantine in human history, and less than two months after taking effect, signs of a recovery have begun to appear. By one estimate, over 90% of Chinese factories and enterprises have now resumed work and production, so it is hoped that this will lead to global supply chains reliant on Chinese inputs progressively returning to normal from this point. This has also led some to ask whether the power of the Chinese consumer could put a floor under the global economy.
In Hubei province, where Wuhan is the capital city, months of quarantine measures will be removed this week, and authorities will allow factories to resume and interprovincial travel to take place. In Wuhan itself, controls on outbound traffic will be lifted by 8 April, virus-free neighbourhoods will come out of quarantine and public transport will resume.
Daily coal consumption at major power generation plants throughout China reached 616,700 t/d yesterday, the highest in two months and over two-thirds of normal usage this time last year. Here in Shanghai, along with other major cities, it’s almost beginning to feel like business as usual. Many people are back in the office, restaurants and shops have customers, businesses are trading, and Apple is reopening its retail stores. Even peak hour traffic has returned.
Previously, Shanghai, along with local governments around the country, mandated wearing masks in public and issued the highest level health alert. But the National Health Commission recently revised policy regarding masks, and the municipal government has downgraded the health alert from level one (highest) to level two.
The mainland’s two stock exchanges, Shanghai and Shenzhen, managed to avoid the panic that led to breathtaking drops in global stock markets around the world. Buoyed by the government’s response and increasingly confident that China has controlled the virus, the Shanghai composite is only down 12.8% YoY, the Shenzhen composite down a mere 7.1% YoY, and both edging back up. Mainland investors continue to rally and keenly await further signs of recovery, such as the government announcing its “Two Sessions”, the annual plenary meetings for lawmakers and politicians.
But as signs of recovery gradually manifest, data from the National Bureau of Statistics illustrates the economic devastation caused by COVID-19. Key indicators dropped by double-digit percentages in Q1/20, with retail sales down 20.5% YoY, fixed-asset investment down 24.5%, government infrastructure investment down 30.3%, and real estate investment down 16.3%. And just as China’s workers and businesses are coming back online, major trading partners are shutting down, prompting some to further revise growth forecasts in light of weakening demand for exports.
Yet it is worth remembering these numbers are not indicative of structurally weak demand. The average family that was planning to buy new clothes, a car and a house, has deferred these purchases because of a lockdown. Ten years ago, a sharp decline in global demand for exports was catastrophic. But net exports (value of exports minus the value of imports) over the last several years have contributed roughly zero to China’s GDP growth, and consumption now accounts for almost 60% of the economy.
The more pressing issue for China in terms of weak global demand is unemployment. The application of force majeure clauses in contracts, and the sheer volume of orders being cancelled, have dealt a heavy blow to factories. On this front, subsidies, tax relief, exemptions for rent and insurance, along with reimbursement for unemployment, were among the first measures taken by the authorities. More importantly, the central government recently announced new monetary easing policies, along with special treasury bonds for local governments to fund infrastructure projects. And there’s still plenty of fuel left in the tank for further economic stimulus down the track.
Certainly, consumer confidence is returning slowly, and recovery is predicated on China continuing to control the virus. Imported cases are a daily problem that continue to bring the risk of a second wave. But China’s progress containing the virus has bought time to learn and adapt, and so far, at least in Shanghai, it’s back to business for now.