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Market Events

Insights Webinar 2020: China's Road To Recovery After The Coronavirus Shock

Eric C. Moffett, Portfolio Manager, Asia Opportunities Equity Strategy
Christopher J. Kushlis, CFA, Asia Sovereign Analyst, London
Leigh Innes, Director of Research, International Equity Division

Recorded on April 9, 2020

Executive Summary

China’s Recovery

  • Eric Moffett noted that the supply side is nearly back to normal, with manufacturing factories operating at around 90-100% capacity and 90% of shops open for business. Small and medium enterprises (SMEs) have been slowerto recover.
  • We are closely monitoring bellwether indicators, including subway traffic (operating at 40% of normal capacity), and general movement across China (tourist sites, restaurants etc.). We are using migration and telecom roaming data, but importantly talking to companies to analyze on-the-ground data.
  • There is some skepticism about government data, but Moffett believes this to be directionally correct. His contacts have given him encouragement that the coronavirus is well under control.
  • The return to work has been driven by three factors — testing, temperature checking, and masks. Hong Kong based Moffett noted that he had been tested nine times in one day.
  • Moffett believes that the measures in place should help to prevent/contain a second wave of the virus. The biggest concern is visitors from the West, but he cited that flight links into China had almost ceased (capacity was down 96% on normal levels). Overall, China is slowly returning to normality.

Supply Side Back to Normal. What about Demand?

  • Chris Kushlis described a sharp fall in activity. Industrial production was down 13% and automobile sales down to 40–50% levels, which was a relief from 80% declines in the January/February period.
  • Moffett and Kushlis are focused on assessing an export shock from developed economies, and they expected the economic recovery to be pushed out into the second half of 2020.
    We are witnessing some pent-up demand coming back, but this has been slower as consumers are being more tentative.
  • How quickly developed economies recover will have a profound implication for China and the rest of Asia. The longer the lockdown in western economies, the more the negative impact is likely to be felt in China.

The Government Response

  • Compared to developed markets, China’s policy response has been a pale shadow of what has been implemented by developed economies, said Chris Kushlis. The primary reason was that China did not face the same financial system pressures.
  • The People’s Bank of China (PBoC) announced a cut to the required reserve ratio and a small interest rate cut, but this, along with some other small measures (electricity bills cuts and restructuring of loans) only amounted to 1% of GDP.
  • Compared with 2009 stimulus, Chinese policymakers are being a lot more guarded because of less balance sheet space, but also not wishing to leave a legacy of higher debt and overcapacity.
    While the measures are moderate so far, there is scope to do more, if needed. The PBoC has many weapons in its arsenal to help manage the stability of economy through 2020 and beyond.

Long-term impact on China

  • The economic rebalancing of growth away from exports to domestic consumption and investment to services has been a long-term aim. The services sector still only constitutes around 60% of GDP. Therefore, Kushlis feels it has some way to go to match developed economies.
  • In recent years, China has focused on deleveraging and will not be overly aggressive in deviating from this path. The main concern is that China is becoming more indebted. Using balance sheets to secure stability now may cause problems further down the road.

U.S. / China Trade War

  • Coronavirus has pushed this to the side for the moment. An easing or reduction of tariffs would effectively be a stimulus boost for both countries.
  • Mixed signals remain for the long-term U.S.-China relationship. There also appears to be bipartisan agreement within the U.S. on the general approach to China.
  • The China/U.S. relationship is likely to remain strained, with much more rhetoric on self-reliance. We are hopeful that lines of communication remain open as both parties will benefit.

Opportunities and Risks

  • Moffett noted that Chinese equities have performed well in relative terms and bottomed when virus infections peaked. Because of this, his focus is currently on other areas of Asia where better value can be found, like Southeast Asia and India.
  • He noted the trend of import substitution. There has been a huge push to source goods locally and some local companies now offer competitive quality, service, at lower prices, and potentially have aspirations of becoming global players.
  • While tech—ecommerce, gaming, etc.—is still attractive, the best opportunities are in sectors that have performed poorly recently, and certain companies benefiting from industry consolidation.
  • Long term trends, however, remain the same. The move from “offline” to “online” continues to accelerate, and Moffett remains focused in specific areas. Many of these companies’ share prices have held up well.
    He continues to be interested by the China A-share market. Moffett reiterated the need to be laser-focused, however, on balance sheet robustness.
  • April will be an important month for data. Information on the virus, lockdown easing, and stimulus measures will help to guide the way forward. January was the maximum point of concern, and Moffett believes that China is now weeks, not months, away from a more normal environment.
  • He cautioned to be prepared for volatility along the way.

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