China gets back to work
The Chinese economy is gradually recovering from the worst effects of COVID-19 and could be fully back to work by early May, according to analysis from Steven Sun at HSBC Qianhai Securities.
As uncertainty around the spread of the virus grew and a lockdown on personal movement took hold, workforce participation failed to recover from the usual Chinese New Year dip.
HSBC’s ‘work resumption barometer’, measured on a scale of 1 to 100 and based on a range of metrics including traffic congestion, air quality, coal consumption, and property sales, fell to a reading of just 20 on 8 February.
However, Chinese authorities have been easing restrictions on movement, and many factories and offices are approaching full capacity. By 25 March, HSBC’s analysis put the work resumption barometer at 65.
A full resumption depends on how effectively the national and local authorities control the risk of a secondary outbreak as people get back to normality. That means the rate of workforce return will differ.
Banks, the software sector and online entertainment are generally in good shape. The situation in primary industries such as infrastructure and industrial production is significantly better than in service sectors where the risk of human-to-human transmission is higher, like restaurants, transportation and tourism.
State-owned enterprises are doing much better than smaller businesses and private enterprises. Many companies are increasing their use of cloud office services.
The main problem now is demand. Having resumed activity, many businesses are facing a fall in appetite for their products, both domestically and overseas.
On 23 March, HSBC Economics Research lowered its year-on-year GDP growth forecast for China to -5.5 per cent in the first quarter, and 3 per cent in the second. China may also feel the force of further trade shocks as the virus spreads globally. HSBC analysts believe meaningful growth recovery is unlikely until the third quarter of the year.
For example, in the IT hardware supply chain, although disruption in production has been limited, many companies are preparing for a deceleration in shipment growth due to slowing demand and cancelled orders. Sectors dependent on exports or exposure to part of the international supply chain – such as garment and toy manufacturing, electric vehicle components and solar products – also face uncertainties as global disruption increases.
While China’s economic response to COVID-19 has been supportive, these approaching headwinds will provide further challenges. Further analysis from HSBC Global Research’s Qu Hongbin suggests that policymakers may have to get creative to shore up confidence, support businesses and lift up domestic demand.
For instance, local government bond issuance could be increased to aid infrastructure investment. Issuance already in the pipeline should lift infrastructure investment growth to 10 per cent year-on-year, but going to 15 per cent would produce a stronger economic rebound.
Beijing could also cut corporate taxes and fees permanently, and further boost bank lending, particularly to small and medium-sized enterprises who have been worst affected by the COVID-19 slowdown.
China’s monetary policy easing has so far been more muted and gradual than the action seen in other economies, but Beijing has the policy space to make bolder moves to help lift confidence as well as to help lower the cost of financing for businesses.
Mr Qu Hongbin suggests there may be a further lowering of the Loan Prime Rate, offered by commercial banks to prime clients, by 50 basis points (bp). The Medium Lending Facility could also drop by 20bp, and the deposit rate by 30bp, for the rest of 2020.
- Disclosure and disclaimer
The following analyst(s), economist(s), or strategist(s) who is(are) primarily responsible for this report, including any analyst(s) whose name(s) appear(s) as author of an individual section or sections of the report and any analyst(s) named as the covering analyst(s) of a subsidiary company in a sum-of-the-parts valuation certifies(y) that the opinion(s) on the subject security(ies) or issuer(s), any views or forecasts expressed in the section(s) of which such individual(s) is(are) named as author(s), and any other views or forecasts expressed herein, including any views expressed on the back page of the research report, accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Steven Sun and Qu Hongbin
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