AS Europe and the US enter the peak of the pandemic, the good news is that there is light at the end of the coronavirus tunnel. As the first country to detect Covid-19 and seemingly containing it, China is emerging from the draconian lockdown with the reopening of businesses and life slowly returning to normal.
The purchasing managers’ index (PMI) for manufacturing, released by the National Bureau of Statistics on March 30, returned above 50 for March 2020, to 52, indicating an expansion. In February 2020, it plummeted to 35.7 as factories were forced to remain closed following the Lunar New Year holidays as the country battled Covid-19.
Readings for March should not be taken as a surprise, says Chang Shu and David Qu at Bloomberg Economics. “They confirm the observations from higher frequency, partial data which showed the economy improving after the coronavirus outbreak slammed output and demand for the first two months of the year.” The improvement, they add, offers a glimpse of hope that the virus hit – as bad it may be – could be short lived, giving some solace to countries going through intense periods at the moment.
“China’s restaurants and retail shops are buzzing again as diners and shoppers emerge from the month-long closure of public areas to contain the spread of the coronavirus,” shares Ned Salter, head of global research, equities, Fidelity International, an asset manager with over US$310 billion under management. “While many people still wear face masks and look nervous in crowds, their outing signals the beginning of a recovery in the world’s biggest consumer market.”
Salter estimates that more than half of the restaurants in large Chinese cities have reopened, basing them on information gathered from operators, although many are running shorter business hours. “Fast-food chains are generally doing better than high-end venues as many customers prefer picking up takeaways to minimize infection risks. To assure diners, restaurant owners have taken health measures such as regular disinfection and wider spacing between tables.”
Fidelity research, he adds, shows that for many large restaurants the daily turnover remains 40% to 50% below levels before the outbreak. “It may take a few more months to see a full recovery given fragile public confidence in the virus being firmly subdued.”
A revival of domestic demand will be key for China, especially as the global supply chain disruption at the beginning of the health emergency has now turned into a full-blown collapse in external demand. As the rest of the world battles Covid-19 in the coming months, Alicia Garcia Herrero, chief economist at Natixis, expects China’s growth in 2020 is likely to deteriorate from the level in 2019. “China showed strength in containing the transmission of the coronavirus in a short period of time, but the economic consequences will not be as short-lived.”
ANZ shares a similar view. “We see two limitations to China’s recovery, because: consumer behaviour is likely to remain cautious for a considerable period of time; and, the deterioration in global demand will cap a recovery in exports. Indeed, what was initially perceived to be a supply-side issue has rapidly degenerated into a problem of deficient demand.”
The managing director of the International Monetary Fund, Kristalina Georgieva, did not mince words when she spoke on March 27: “Unfortunately, we are projecting recession for 2020 (globally). We do expect it to be quite deep and we are very much urging countries to step up containment measures aggressively so we can shorten the duration of this period of time when the economy is in standstill.”
As China steps up production moving from a health crisis to recovery, Georgieva reckons that path offers a useful experience for the rest of the world. “China doing better in 2020, is very important for China. It is also very important for the rest of the world given China's share in the world economy.”
Fidelity’s Salter adds: “As the first major nation to have seemingly contained the virus, China’s consumer recovery will shed some light on what may happen in the rest of the world as the outbreak eventually peaks and recedes. What is clear is that the resumption of consumer spending is uneven and is unlikely to follow patterns set in the past.”
One estimate suggests that the Chinese economy should resume full activity by the end of April 2020. “We find that the Chinese economy is still operating 25% below its usual levels,” points out Françoise Huang, senior economist at Euler Hermes, the credit insurer, based on traffic congestion and coal consumption relative to its usual level in the sixth week after the Lunar New Year. Meanwhile, property transaction volumes remain at 70% below their usual levels.
He believes the authorities will restart the economy gradually in order to contain the risk of a renewed acceleration in the contagion of Covid-19 as migrant workers return to their places of work, and as the epidemic in the rest of the world worsens.
Sharing the view that recovery is underway, Salter of Fidelity expects the pace of normalization to be somewhat slow. “We need to see more consumer confidence to sustain the improvement and that will depend on how well China deals now with imported cases to contain the virus fully.”
Meanwhile, construction has resumed on the majority of the key infrastructure projects on which activity was suspended or delayed. And with an expected increase in government infrastructure spending and strong order backlogs, Moody's Investor Service expects companies in China to recover much of the revenue they lost earlier this year.
