Chinese business activities-Month of May & June 2020
Fiscal stimulus and credit easing continue to show strong results during the reopening process. Infrastructure investment, for example, rose to 11% YOY in May from -27% in Feb; Corporate and New household loans increased 13% and 14% YOY, respectively.
People's Bank of China paused its medium-term lending facility rate cut in June primarily due to better export results driven by medical supplies, which rose about 80% YOY in May, and tech products, which increased 8% YOY in May.
While the rebound seems strong on paper, the government would need to extend its policy easing to offset potential Q3 demand weakness due to a slowdown in exports and high borrowing costs. (drop in demand for PPE as COVID hospitalization rates decrease; decline in demand for labor-intensive products)
Employment rose in April as a surge in PPE orders overseas led to an increased need for human capital, but we began to see smaller companies begin lay-offs in May and this trend continued through June. (PMI Employment data fell back to contraction zone at 49.4 in May and then declined further to 49.1 in June)
PMI for small firms fell back to contraction territory at 48.9 in June. In response, China's central bank announced (1st of July) they will cut the re-lending rate by 25 basis points to lower funding costs and ease the pressure for smaller firms.
PPE orders rose in May, which led to a pick-up in new export orders to 42.6 after previously staying low at 35.3 in May.
Overall auto sales are up 14.5% in May after falling to 40.8% in March from a year earlier. EV sales declined in May, 25% YOY, given higher sales in the first half of 2019 were largely driven by government subsidies; Tesla continued their leadership position with sales up 330% YOY. (By using batteries produced by a local manufacturer, they were able to pass off their savings to the consumer by dropping prices)
We continue to see a surge in local road traffic volume during holidays: Labour day (May 1st), and most recently Dragon Boat Festival.
Chinese PM Li started to promote the street vendor economy, partially to help stabilize local economies while more people were getting laid off from their job. This led to a further resurgence of in-person consumption as counties lifted shutdown restrictions. (Retail sales growth turned positive to 1.6% YOY in May compared to a 3.1% decline in April)
People are slowly returning to regional travel. While up from previous months, total tourism was still down 49% YOY nationally and China's domestic air travel was down 35% in the first half of June YOY, up from -50% YOY in May. Hotel occupancy reached over 60% and revenue per room was up 13% in May.
In terms of deal flows, Chinese firms recorded 299 venture capital deals for June up from 252 deals in May. (Wind data)
China does have about a 2-month lead time compared to the US, which makes a good case for china to be used as a model for predicting reopening trends. Based on the economic data and business trends that we have been following, it seems the US can follow China to have a strong recovery or mean reversion. However, some states are diverging from China’s recovery trajectory. After multiple states eased lockdown measures before the new daily case distribution became positively skewed, we began seeing spikes in recent days. While these states should be able to contain the spread given a better understanding of more effective containment measures, this does not eliminate the risk of a regional wave.
The recent Beijing Xinfadi market COVID outbreak demonstrated that a similar event could occur in other densely populated areas. The pandemic risk control system played an essential role during the containment of this outbreak. The authorities closed down schools, limited public transport with nucleic acid tests required prior to departing the city. Rather than a complete lockdown, Beijing instead focused on a targeted approach; the government used a social app and QR code tracking to locate people who had visited the market. This enabled local agencies to test 2.3mm people over the course of 8 days with a daily testing capacity of 500K.
If Beijing’s outbreak risk management response acts as a guide, the US will be in a much better position to contain a further outbreak due to increased precautionary measures by local agencies. A close collaboration between different levels of government is required to make the response more effective.
