Economy, Talking Point

Coming out of the crisis

Four areas to watch for signs that China’s economy is recovering


Industrial output started to pick up in March as textile mills like this one resumed production

The pressures of the Covid-19 pandemic are unprecedented, creating widespread uncertainty about where the world is heading. They make the mood more febrile and suspicious too. Claims of no new domestic infections for days at a time in China are implausible, sceptics say, while rumours that Wuhan’s death rate is higher than reported have been fanned by speculation that thousands more urns are being delivered to funeral homes than the official fatality rates require. Residents in nearby Jiangxi don’t seem wholly convinced by the situation either, which is why there were clashes on a bridge into Hubei last Friday as people tried to leave the province at the epicentre of the pandemic.

All the same, the relaxation of China’s wider quarantine against the virus surely suggests that the government thinks the worst has passed. That’s giving it more time to focus on the chaos that the pandemic has created, especially its economic impact.

HSBC is now forecasting GDP growth of just 3% for the full year, about half of what was anticipated just a few months ago. But as first into the crisis, the Chinese should be first to come out of it as well. Here’s our summary of four of the things to look out for as signals that the economy is getting back on track.

Pollution coming back: a sign of the economy getting going again

The evisceration of urban smog was one of the more dramatic demonstrations of the way that Covid-19 was closing down the Chinese economy earlier this year. As we reported in WiC485, the final two weeks of January and the first two weeks of February saw an unprecedented drop in nitrogen dioxide levels because of fewer emissions from cars and lorries, power plants and industrial facilities.

The impact was visually stunning on satellite images showing the shroud of toxic gas that typically hangs above hundreds of Chinese towns and cities had evaporated.

The skies above northern Italy – where the lockdown is one of the strictest in Europe – are now showing the same trend.

The pandemic’s puncturing of China’s heavier-duty pollution is going to stir a longer-term argument on choices about public health. Marshall Burke, a climate change specialist from Stanford University, reckons that the drop in emissions this year could save the lives of up to 77,000 children and older people in China.

But satellite tracking is already showing a pick-up in Chinese pollution as the government tries to get the economy moving again. This has been happening since early March, especially from emissions from larger state-owned enterprises in heavy industries, which are more easily prodded back into production. Blast furnaces and power plants aren’t as reliant on migrants coming back to work, which also makes it easier to get them back into business. The concern for green campaigners is that pollution is set to soar as the authorities try to catch up for lost time. There’s a blueprint for this from the global financial crisis, when emissions fell during the most chaotic months of the credit crunch before rebounding rapidly once the economy found its footing again.

Expect a determined drive to reignite the economy – one that takes priority over measures to protect the environment. Keep an eye on the pollution indices for how quickly that is happening, as well as other signals that industrial activity is darkening the skies, including spikes in coal shipments through the main ports and surges in output at the biggest steel works.

Shifts in smartphone activity: a signal that life is getting back to normal

Evidence that the lockdown is largely over has drawn on a wide range of indicators, including the resumption of public transport and the return of traffic congestion to major cities such as Beijing, Shanghai and Shenzhen.

Even some of the metro lines in Wuhan – ground zero of the outbreak – reopened on Saturday, although traffic was just 5% of its typical pattern.

Another way of looking for the revival of normal life is by monitoring what people are doing on their smartphones.

With most of the workforce on its way back to the office there will be a slowdown in registrations for the kind of office apps that have been helping firms to manage their work-from-home staff (see WiC486).

Last week we also wrote about how Tencent had seen a sales boost in some of its key divisions, based on the behaviour of tens of millions of people living under lockdown.

Playing mobile games was one of the main ways of surviving the monotony, with spikes in player numbers for its most popular titles. Some of that surge is going to level off, although game bosses are hoping that players in Europe and North America will take up some of the slack now that millions of them are confined to their homes as well.

Other parts of Tencent’s empire have flourished during the pandemic, including a streaming service that broadcasts lessons to millions of school children. But some divisions have disappointed during the disruption, particularly Tencent’s mobile payments arm. The shuttering of shops during February and March saw payment volumes slow substantially and the dislocation of the period also saw companies hold back on signing up for Tencent’s cloud services division.

There was a pullback in advertising income as well, which the company blamed on delays in the releases of new films and dramas, and the cancellation of sports events.

The situation has been similar for Meituan-Dianping, the food delivery and internet services giant. The newspapers have celebrated the nation’s delivery teams as heroes in providing a lifeline to those unable or unwilling to leave their homes. Platforms like Meituan’s introduced ‘contactless’ exchanges to limit the spread of infection, leaving orders on doorsteps or at pre-agreed drop-offs.

In some parts of its business Meituan has benefited too, with a fourfold spike in grocery sales in some cities, and average order sizes going up 70% in February.

But other business units have been victims of Covid-19 – most notably meal deliveries from restaurants, few of which were open through February and much of March. Restrictions on travel have also savaged its hotel-booking and ride-sharing businesses.

As a result Meituan said this week that sales would decline year-on-year in the March quarter and that it couldn’t predict with certainty how its businesses would perform in the remainder of the year (see Sinofile on page 22).

In general, delivery volumes should increase as distribution networks regain their reach and logistics teams recover access to districts that were ringfenced in the worst of the crisis. Meituan will be counting on a swift recovery in meal deliveries in particular as restaurants reopen and customers put in orders now they are back at work and with less time to cook at home.

An uptick in sales here would be another indicator that China is on the path to recovery.

Shops and stores reopening, and other pointers that consumers are starting to spend

While the government can order many of the country’s biggest companies to get back to work, it can’t pressure consumers in the same way to start shopping again.

Most of China’s retailers are already back in business and the best-known brands have been coming out of weeks of hibernation too.

All 42 of Apple’s stores in China were reopened by the middle of March, for example, albeit with limits on the numbers of people that can shop at the same time. Nike CEO John Donahoe told investors last week that 80% of its shops in China had reopened (it has 7,000 outlets there).

Yet the return to normality is likely to be a stop-and-start process – as confirmed by the reclosure of more than 500 cinemas that had welcomed back moviegoers last week (see WiC488 for more on the limited interest from audiences).

The same theatres were ordered back into shutdown by the central government last Friday, presumably on fears of a second wave of infections.

Retailers have been hoping for a situation more like the aftermath of the SARS outbreak in 2003, when spending on items like cosmetics and clothing roared back once the epidemic died down. The media has also been talking about a frenzy of ‘revenge spending’ as shoppers come out of quarantine. The theory is that they will rush to stores, especially in the luxury goods sector, releasing months of pent-up demand.

Luxury brands add hopefully that restrictions on travel are making it almost impossible for Chinese to go shopping overseas, which could mean a bigger burst of buying at home.

One anecdotal sign that consumer confidence – at least at the higher-end of the market – is bouncing back was an online wine auction held by Acker at the end of March. A new world record was set for one of the magnums on offer. “The three top buyers of the sale were from three different cities in mainland China, which shows China is ready for business,” claimed John Kapon, Acker’s chairman.

But as yet there isn’t strong evidence of a wider resurgence in retail and expectations were further eroded by reports that Communist Party rank-and-file have been asked to take the lead at shopping malls in an effort to encourage others.

Rising unemployment will also make shoppers more reluctant to throw open their wallets. The urban jobless rate jumped to 6.2% at the end of February from 5.3% in January, which understates the situation as the survey excludes many types of employees, including migrant workers trapped in their home provinces for much of the pandemic.

HSBC is also warning that there could be worse news to come from small and medium-sized enterprises, which account for 80% of jobs in the towns and cities. Reports that nearly three quarters of SMEs were back in business last week – a huge increase from a month earlier, the Ministry of Industry and Information Technology said – give a more optimistic steer (in WiC484 we looked at gloomier forecasts that 30% of workers at smaller firms could be laid off; while the head of restaurant chain Xibei warned that 40 million people in the catering industry could lose their jobs).

Strains in the job market are also contributing to a hike in credit card debt, the South China Morning Post says. Executives at two banks who asked not to be named told the newspaper that overdue credit card bills rose by half in February from a year earlier, and Qudian, a Beijing-based online lender, went on record that its delinquency ratios had surged to 20% in February from 13% at the end of December.

None of that sounds like much of a basis for a retail boom, although the share markets are giving a glimpse of the sectors that investors favour for a faster recovery. Beer brands and sportswear firms were early beneficiaries of stronger sentiment but the response was more mixed to an uptick in the shares of the jewellery retailers. Why? Some took it as a sign that demand for jewellery was on its way back to pre-pandemic levels. Others saw it as a defensive bet on purchases of stores of value – such as gold – and another signal that consumers are deeply cautious.

Signs of life in the ports: signposting demand for Chinese exports

Our final indicator is less about what’s happening in China and more about the global demand for its goods.

Exports account for up to a fifth of Chinese GDP and sectors like metals and materials, chemicals, textiles and machinery make up an even greater share of their sales overseas. The government wants these firms back to pre-pandemic performance, which is why Xi Jinping, the president, made a visit to the port city of Ningbo last Sunday – his first trip outside the capital since he went to Wuhan on March 10.

Ningbo and the neighbouring facility in Zhoushan make up the world’s third largest container port, handling 27.5 million standard containers last year.

State television laboured the point on Xi’s visit, describing it as “a clear signal to maintain stability of the global industrial supply chain.” But throughput at the main container terminals has been far from solid. Outbound traffic through Shanghai – the biggest of the container ports – plunged by a quarter in February on an annual basis. Because it takes between 20 and 40 days to ship goods to the United States, the American ports began to report the repercussions from the middle of March. Overall shipments during the first two weeks of that month slumped 45%, S&P Global says, while shipments of machinery, electronics and computers were harder hit, plunging almost two-thirds.

Much of that was due to disruption at the point of production in China but the new brake on traffic is going to come from the other end of the supply chain as demand dries up in its key export markets.

The coronavirus is chilling demand across a myriad of markets. As an example, we reported in WiC484 how Bangladesh’s garments firms couldn’t get enough supplies of key raw materials after Chinese efforts to contain Covid-19 went into full effect. But now it’s the Bangladeshi factories in slowdown mode, partly due to the way that measures against the coronavirus have been disrupting their operations but more because demand has disappeared in developed markets for their goods. Fashion retailers around the world have already cancelled or delayed orders worth more than $3 billion, the Bangladesh garment export association lamented this week.

These kinds of commercial contractions are reported across many industries, creating a huge problem for Xi Jinping, who can’t magic up demand overseas, even if he can get much of the domestic economy running again.

China’s official Purchasing Manager’s Index has just reported a score of 52 points for March. That suggests an expansion in economic activity, which surprised analysts, many of whom had predicted another month of contraction following record lows in February.

Yet despite most of the sub-indices getting back into positive territory this wasn’t the case for new export orders, where the survey was stubbornly negative at 47.1.

What this means is that the challenge for China’s factories is shifting from resuming production to coping with a slump in new orders for their goods. Without a recovery in international demand China’s container terminals will be short of work, reporting lower levels of traffic, like they did in February.

Xin Guobin, vice-minister of industry and information technology, said something on Monday to the same effect. “With the further spread of the international epidemic, China’s foreign trade situation may further deteriorate,” he warned. “Overseas and domestic demand are both slumping, having a significant impact on some export-oriented companies. These companies might face a struggle to survive.”

Of course, one area with signs of life is the export of medical equipment to fight the virus – for more on that see this week’s “China and the World”.

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