China’s road to recovery could be lengthier

The Covid-19 pandemic continues to wreak havoc across the globe. According to data from the World Health Organization (WHO), there have been 1,696,588 confirmed Coronavirus cases and 105,952 deaths due to the virus infections as of April 12. However, China, the epicentre of the pandemic, has reported only 83,482 cases and 3,349 deaths.

China accounting for just 4.92% of the total global cases and 3.16% of global deaths, on the 83rd day since the WHO started collating the data, has raised many eyebrows. And, another surprise came on April 8, when China—after two-and-a-half months—lifted a lockdown from Wuhan, the capital city of Hubei province and the origin of the Coronavirus pandemic.

Wuhan apart, Covid-19 containment measures have been gradually relaxed and removed over the past month or so since late February in other parts of China. However, the key questions which need to be asked include the extent to which China is back to work, and will the world see a V-shaped recovery.

In an April 8 note, Dong Chen, senior Asia economist at Pictet Wealth Management, part of the Geneva-headquartered Pictet Group which oversees $595 billion in assets under management (AUM), tried to assess China’s current situation with the most up-to-date data available.

Chen said that the data is not only capable of giving a better idea about China’s growth outlook, but may also shed some light on the possible path of recovery for many other economies, which are currently under varying degrees of lockdown and will possibly go through a similar process.

The Chinese government has been trying hard to get the economy back on track, but Chen pointed out that there were a few roadblocks. Supply-side constraints posed by various containment measures were the main obstacles, as migrant workers were facing difficulties in returning from their hometowns to factories after the extended Chinese New Year holidays.

“This led to massive supply-chain disruption, which was exacerbated by the partial shutdown of the national transportation network,” Chen noted. However, these constraints were gradually removed, as the country progressively returned to business, especially since March. “At this stage, the manufacturing sector’s improvement was obvious—firms rushed to get back to work to fulfil backlogged orders.”

But, since late March another obstacle started to emerge for China: the collapse of external demand, as the U.S. and many European countries moved into lockdown. While official data was not yet available, Chen said various anecdotes suggested that export orders were evaporating rapidly. He pointed at the latest Purchasing Managers’ Index (PMI) report, which provided some hints.

“After crashing to 28.7 in February, the new export order sub-index rose to 46.4 in March, remaining below the 50-threshold,” Chen noted. “We expect this gauge to decline again in April, reflecting the free-fall of demand from Europe and the U.S.”

Among available data sets, Chen pointed at the Chinese data on power generation, which is implied by daily coal usage by major power generators, that provides a fairly reliable indication of industrial activity in China, as industrial-power usage accounts for over 70% of the country’s total power consumption.

“After accelerating since early March and reaching about 90% of the historical average level, industrial recovery in China seems to have lost steam again over the past week,” Chen highlighted. “The latest reading suggests that industrial activity has likely fallen back to about 80% of its historical average level.”

Additionally, Chen highlighted the data on Chinese steelmakers’ capacity-utilisation rate, which started to fall behind the historical average in the past two weeks, after staying in line with the historical pattern earlier on. In Chen’s view, the latest development is likely to reflect the impact of the decline in external demand on the Chinese industrial sector.

“While things can still change and probably more data points are needed to confirm the trend, what the high-frequency data currently shows us is worrisome,” noted Chen.

The data poses a downside risk to the Pictet Group’s current core scenario, in which the group had expected China’s industrial activity to reach the end-2019 level by the early second quarter (Q2) of 2020. “Obviously, this is still not the case according to the two high-frequency measures,” noted Chen. “If the industrial recovery continues to stall as it does now, our Q2 growth forecast is at risk,” he added.

On the services front, Chen pointed out that the latest development is not encouraging either. He highlighted that China’s housing sales’ numbers are volatile due to seasonal factors—with sales concentrating on weekends. “After reaching levels close to the historical average at the end of March, housing sales fell again in recent days,” he wrote.

Also, many leisure activities are in hibernation. Cinemas, for example, are still effectively dormant. Chen said China’s total box office revenue was just CNY 20,000 ($2,800) in the week ended April 6. While Chen admitted to not have high-frequency data on China’s restaurants, but from what he heard from the Pictet Group’s contacts there, most people are still quite cautious about going out, despite the fact that reported new cases have dropped significantly.

And Chen highlighted that the hearsay is affirmed by China’s urban traffic congestion data, which depicts a similar pattern. “While weekday’s traffic levels are already getting close to normal, on weekends, the traffic is significantly below the historical average and only shows very limited improvement over time,” Chen wrote. “This suggests that other than essential activities (example: going to work), many people still choose to stay home on the weekend,” he added.

“The number of daily travellers (railways, buses, and airplanes combined) is still only at about 40% of the historical average at this point,” Chen added. “Overall, it is fair to say that the recovery of services is ongoing but at a much slower pace than in the industrial sector.”

The inference one can draw from Chen’s analysis is that even after containment measures are lifted, the pace of economic recovery could still be lengthy and gradual. “In the absence of a vaccine, economic activity, especially in the services sector, is unlikely to snap back to pre-crisis levels because of people’s concerns about ‘the second wave’,” noted Chen.

Rightly so, on the virus front, new cases in China have risen moderately in recent weeks after dropping to virtually zero, mainly due to the so-called ‘imported’ cases. While they have been fairly limited in scale, with the latest reading being 62 on April 7, Chen said that this is similar to the situation in South Korea, the only other Asian country which has apparently contained the Coronavirus after a massive outbreak so far.

“But the possibility of a ‘second wave’ has kept many people on alert,” writes Chen. According to his observations, most people still maintain a high level of vigilance, like wearing a face mask remains the norm in public spaces.

Additionally, various surveillance procedures are still in place, such as the ubiquitous use of thermometers in public venues and the wide adoption of a ‘health code’ system—a QR code generated by a government certified mobile phone app that indicates an individual’s health condition, which is required for many daily activities such as boarding a bus.

The high level of vigilance, in Chen’s view, could reduce the risk of a ‘second wave’ of infection. At the moment, data of new daily confirmed cases indeed show such a risk is likely under control. “Also because of people’s high levels of vigilance, it means people may continue to avoid social gatherings voluntarily even after official containment measures are removed,” Chen noted. “This will lead to a slow recovery of the services sector.”

Chen summarised that weak external demand and people’s high levels of vigilance seem to drag on the recovery of the Chinese economy. The current pace of economic recovery seems to fall behind Chen’s core expectations under of industrial output returning back to the Q4-2019 level in early Q2-2020, and back to trend growth by end Q2-2020 while services were to be back to trend growth by the end of Q3-2020. “These projections are subject to potential further downward revisions upon confirmation of additional data,” Chen warned.

Back home, which we wait for the formal announcement of a two-week extension to the 21-day lockdown, imposed on March 25, the reality check on China’s current state of affairs gives enough food for thought for decision-makers. The road to recovery would be everything, but smooth.

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