China – Getting back to business?

It’s nearly six weeks since we moved into Lockdown with little indication at present as to when restrictions are likely to be eased. I think it is fair to say that any initial easing will be limited and gradual. There has been much debate over the past few days as to the options available including some sort of traffic light system, shielding the older/more vulnerable in society, mass testing to name a couple but as I write the government are, understandably to a degree, not committing to any sort of firm plan at this stage. One thing I am certain of is I am unlikely to be going to watch Liverpool at Anfield for some time to come! 

Inevitably restrictions will at some point be relaxed as governments around the world attempt to balance the human cost of the pandemic against the economic damage. Undoubtedly the priority must be to save as many lives as possible but there is also the desire to get people back into work so it will a huge challenge for our leaders to navigate over the coming weeks and months.

With China having been the first major economy to have been hit by the Pandemic I thought it would be interesting to share some interesting points from a recent conference call with one of our investment partners ‘Aberdeen Standard Capital’.  They discussed whether we could take any indication from China’s economic path in terms of how economies could potentially recover following a relaxation of current restrictions. Naturally, it could be argued that China’s experience of the Pandemic has followed a different trajectory to our own and other developed economies but nevertheless they still went through an unprecedented shutdown of their economy for a prolonged period and experienced a huge drop off in their industrial, service and retail sectors.

There were 3 specific areas covered:

1. What we’ve learned from the coronavirus shock following the release of China’s Q1 GDP data?
2. What our economic indicators are telling us about the Chinese recovery?
3. What it says about the prospects for getting back to business, there could be lessons here for other countries. 

China’s Q1 GDP data:

• The official GDP number came out as a quarter on quarter fall of -9.8% and the first time we’ve seen a quarterly fall in Chinese GDP data.
• The number was close to consensus and a bit below the -14% quarter on quarter number that we expected, but overall the number seems credible.

The recovery path:

• The official monthly data suggests it could be a very rapid recovery in the industrial sector, the growth in March almost going back to the levels of activity experienced in January.
• The monthly numbers suggest fixed asset investment (real estate, infrastructure, machinery etc.) remain 10% below January level, recovering from 20% down in February.
• The retail sector has recovered from a 50% fall in February to just over 20% down in March when compared with the January level.
• Chinese exports did recover to their January levels in March although other industrial data does cast a bit of doubt on the official production figure.

Getting back to business:

• The magnitude of the drop helps provide some guidance on what we’re expecting across other economies from around the world in Q2, particularly some who have experienced more extensive lockdown measures.
• China appears to be getting back to business, travel is still restricted and they’re also cautious of a second wave of the virus which would see a reintroduction of more restrictions moving forward.

Whilst the above summary provides some interesting data in terms of how quickly some sectors of the Chinese economy have bounced back to near pre-crisis activity levels there is no guarantee that the UK and other countries will follow the exact same path.  However, a relatively robust pre-crisis economy coupled with the vast amount of stimulus from Governments and Central banks will certainly help fuel the recovery and whilst we inevitably expect further volatility over the short to medium term we are optimistic that in taking the longer term view investors will continue to be rewarded for their patience.