While the coronavirus’s rapid spread did massively hit Chinese growth in Q1 and will still affect Q2 at least, we stay focused on ten factors.
1. Chinese government action
The Chinese government was quick to react to the coronavirus outbreak, implementing radical measures that deliberately sacrificed short-term growth for the sake of containment. In contrast, when SARS broke out in late 2002, it took the government until April 2003 to fully realise the extent of the crisis. This time the alert was raised much more quickly with the publication of more detailed and transparent statistics. The number of new reported cases has declined dramatically and industrial production has resumed on a large scale.
2. Potential impact on the Chinese economy
SARS knocked 2% off of economic growth in 2003, with tourism and related sectors being the hardest hit. Retail sales also lost momentum, falling from 9.2% year-on-year (YoY) in Q1 2003 to 6.8% by Q2 2003. Meanwhile, the Chinese property sector, fixed-asset investment and industrial production proved more resilient. We can expect a similar pattern of impact – particularly on tourism. E-commerce sales proved very resilient in Q1 2020, falling only -2%+ YoY while total retail sales went down by more than -20%. We expect the Chinese economy to grow by +1.2% YoY in 2020 and +11% in 2021.
3. Economic stimulus measures
Global liquidity is being raised further on a massive scale and the Chinese central bank is attentive and active on a daily basis through various channels. Multiple demand-creating fiscal stimuli from various levels of government are also active, helping to buttress growth and offset the contraction caused by the coronavirus outbreak. The contribution of the fiscal package in place represents 2% extra GDP growth so far.
4. The WHO and China’s National Health Commission
While the WHO has declared the coronavirus outbreak a pandemic and cases outside of China surge, China has gradually lifted restrictions. After reporting hundreds or thousands of new coronavirus cases daily throughout much of February, since March China has kept its caseload stable at around 80,000. As of writing, nearly all new infections reported by China’s National Health Commission were among people who were recently abroad. As long as these results can be maintained, we can look forward to a continued rise in Chinese economic activity as sectors across the country reboot.
5. The Chinese consumer
Chinese shoppers account for 58% of GDP today versus 35% in 2003. Before the virus hit, retail sales in China were holding solid and given the rise of automation and e-commerce referenced above, housebound Chinese residents could conceivably carry on
Ten points on China
China has been at the epicentre of many long-life news stories that have commanded investors’ attention over the past year. From its trade war with the US to its slowing economic growth and most recently its origin of the coronavirus epidemic, news impacting the world’s second largest economy has investors on edge. It is important to focus on the key fundamentals.
6. The calendar
Chinese provinces are gradually lifting lockdown rules and we see activity coming back as illustrated by rising power consumption, online travel bookings and the return of pollution. The current risk is of a re-importation of the epidemic from abroad and a collapse in external demand as the rest of the world shuts down.
7. The domestic economy
By imposing strict containment measures, China is automatically serving its domestic economy by keeping spending and capital from fleeing the country. This could add further support to the domestic economy by redirecting funds that would have gone overseas to Chinese businesses.
8. The peak
The SARS outbreak peaked in April/May 2003 and by June the episode was over. This time the peak has already passed in China but still far from being reached in countries such as the US and India. The risk of epidemic re-importation will stay for longer and prevent a full normalisation of activity. The way China does business with the rest of the world is forced to evolve, with extensive dislocation but not composed of only negative factors. There are some promising thematics evolving in the current context.
9. Real estate
Chinese real estate had performed very well for the past four years up until the outbreak. The sector’s fundamentals remain extremely solid but it is too soon to tell whether the virus outbreak has brought on an early peak. Activity in March appears to be resuming positively, a very important signal. If demand does return, it will bode very well for the Chinese economy in H2 2020. Conversely, if the real estate sector begins a downward trend, it will take a significant toll on the Chinese economy and growth outlook.
10. Overweight China
We maintain our overweight on China, although sector selection is paramount and e-commerce players look particularly well positioned in light of events. Beyond the current coronavirus factor, the ‘phase 1’ US trade deal and Chinese government’s ability to support the economy while avoiding any crash landing should both be supportive of Chinese growth re-acceleration from the trough in Q1 2020. And while Chinese growth has slowed considerably
OUR CHINESE GDP GROWTH ESTIMATES FOR 2020
Base-case scenario year-over-year growth