May
Over six months after China detected the first cases of the novel coronavirus, the world remains embroiled in this pandemic. So far, China has fared reasonably well, having comparatively few deaths and an astonishingly low number of cases (although, there are some in the Western intelligence communities that have questioned these numbers). Regardless of what the actual numbers are, China’s economy is starting up again.
Factories are running, and people are moving. There are many masks and some trepidation, but, by and large, the economic powerhouse is resuming. The National People’s Congress has continued as well, so the government is once again operational in Beijing.
Given this, investors may incorrectly assume that China’s economy has immediately bounced back to its pre-coronavirus days. However, from a macroeconomic standpoint, this has not yet happened. China’s economy took a beating with the manufacturing shutdowns which followed the first coronavirus wave, and it appears to have a way to go to recover.
Investors would be wise to understand how COVID-19 is disrupting the Chinese economy, and what buying opportunities these disruptions present. It’s important to note that the Chinese market has been on a spectacular bull run, so COVID-19 may offer a rare chance to buy on a temporary dip.
Here are seven signals showing that China’s economy will be turbulent and maybe changing with COVID-19. There may be some stormy skies, but all evidence is pointing to China being in a fantastic place to recover and move on to a happy, healthy 2021.
China Has Abandoned Their Growth Target This Year
Every year, China sets a target for GDP growth. Typically, the Chinese government is diligent about hitting these metrics. In 2019, for example, the government set a growth target of between 6% to 6.5%. They met that target, albeit at the lower end of the range, with a GDP growth of 6.1%. In years prior, they would also set targets – usually in the 6% range.
In the past 30 years, there has never been a time when they have ditched this target completely – until now. During an address in Beijing on May 21, 2020, Premier Li Keqiang made a speech in the National People’s Congress. There was no mention of a growth target this year, which is highly uncharacteristic for the nation.
Outwardly, Chinese officials remain very committed that the economy will rebound, and many of the jobs lost will come back. However, in the short-term, these aspirations have not come to fruition.
Chinese investments have historically yielded impressive results, so it is jarring to see the government dismiss economic forecasts. This dismissal represents the stark reality of the virus. It’s impossible to predict how China, in conjunction with the world, will recover. However, having stopped COVID-19 in its tracks (at least for now), China is in a unique position to be one of the only countries that allow large-scale manufacturing operations to resume safely. Indeed, many US states and European countries are struggling to get their operations up and running again.
Chinese GDP Shrank 6.8% In The Past Quarter
China’s record streak of increasing GDP came to a stunning halt last quarter as the GDP shrunk by 6.8%. It was the first time China reported a contraction since 1976. Unfortunately, because the effects of COVID-19 are still rippling around the world, it’s unclear if the Chinese economy will manage to eke out growth for the year. That’s certainly still a possibility.
Putting this number into perspective, the UK is also facing its worst economic contraction in centuries. The first-quarter GDP shrank by 4.5% in the US as well. Most Western nations have seen a relatively sharp decline in GDP. While the official figure out of China eclipses most other countries, that doesn’t tell the whole story. What matters equally as much as how much the GDP falls is how quickly it rebounds. So far, most Western countries have seen their economic engines take a substantial amount of time to restart.
Even countries like Germany that handled the pandemic comparatively well see
significant ramifications. There’s no denying that COVID-19 has presented a substantial problem for other countries in addition to China. China is not alone by any means.
However, if the coronavirus impacts are relatively short-lived, then this would present a rare opportunity for investors to take part in one of the world’s largest economies at a discount. With manufacturing resuming and the virus under control, China is an attractive place to do business. Many US companies, including tech giants, who have offices in China, can have their employees work in the office instead of being remote. Depending on how long the Western world remains bogged down with COVID-19, China may see a quick resurgence as a haven for growth.
Chinese Unemployment Remains Elevated
China reported official unemployment numbers in March. That rate was 5.9%, although many analysts think the number could be much worse. Some analysts are stunned that they would even report figures that bad.
While this number may seem high, it’s certainly not as high as the United States, for example, which has an unemployment rate of 14.7%. Furthermore, it’s reasonably in line with previous figures that Beijing has reported. Historically, official unemployment numbers have hovered around 4%, so a jump to 5.9%, even if the real number is slightly higher, is still roughly in line with historical averages. Again, this is much better than the US, which jumped from 3.6% in January to 14.7% in April.
Much like other global powerhouses, including the US and the UK, many aspects of Chinese life changed with the coronavirus. As such, it’s surprising that China’s employment metrics have been as good as they are. With enough time, people will return to their jobs, demand will pick up, and the unemployment rate will likely go down again.
China’s Exports And Consumer Spending Had A Double-Digit Fall
Exports and consumer spending fell 19% and 13%, respectively. These figures are not entirely unexpected, as the COVID-19 lockdown measures significantly impacted manufacturing and shopping. Companies had no opportunity to manufacture products and components for export. Similarly, consumers had no chance to spend!
For the most part, the economy is operational again. Consumers are out spending money, albeit with a mask on now. Factories are operational. Companies such as Tesla had Chinese operations running before they could have factories in the US operating again. Assuming there is enough global demand for the products, it would be hard to envision a world in which either of these sectors remains dampened.
So far, China has been a relative outlier and hasn’t prescribed significant financial relief for consumers. If they send consumers money to spend within the economy, presumably, these sectors will pick up faster.
There is also potential for investors in medical companies with Chinese operations. China has much of the infrastructure necessary to produce many of the supplies the world needs. As the pandemic rages on, it’s not inconceivable that China could provide testing supplies and other medical equipment to nations around the world.
The Economy May Rely On Exports Less In The Future
There is currently much debate going on about China’s role in the global economy. The government has been working to have an economy less reliant on exports and more reliant on domestic spending. With exports having nosedived, this may hasten that transition. People are rerouting goods intended initially for overseas to destinations within China. As empowered consumers emerge and other economies deal with the troubles of COVID-19, goods that were once bound for destinations in North America, Europe, and Australia, may remain within the country.
Further compounding this problem is that trade relations with many countries have hit an all-time low. Tensions between the US and China have never been higher, as have tensions between Australia and China. Both of these countries are substantial trading partners. With tariffs and other potential restrictions on imported goods looming large, exports may not be as profitable as they once were in the past. However, thanks to a burgeoning consumer spending market, the economy may recover reasonably well even if trade declines.
Of course, this creates some exciting opportunities for businesses to re-target their efforts towards consumers. For example, instead of a UK company setting up manufacturing in China, it may set up manufacturing in China to sell to the Chinese market. These changes could have significant impacts on the way investors think about the country and the types of businesses to launch.
The Government Pledged Financial Relief
When governments all across the globe have pledged financial relief for companies and individuals, China is no exception. Premier Li Keqiang announced that 1 trillion yuan would be available to help meet targets, including creating new jobs. While this might seem like a large investment, it pales in comparison to some of the other financial packages that other countries have put together for their residents. Local governments will also receive 2 trillion yuan to help with job losses and public needs.
What’s remarkable about the Chinese economic response to COVID-19 is that it is reasonably small overall. The US government pledged 15 times as much for US residents. Remember that the US population is one-fifth that of China. As of right now, the government is not seriously discussing further economic support measures, but that’s not to say that they couldn’t happen in the future.
Some people, including Finance Minister Liu Kun, are arguing that Beijing needs to do more to support people. The issue, of course, is that China’s debt-to-GDP ratio is 243% . While they can pump more into the economy to offset the effects of COVID-19, it’s unclear whether that would hurt the effort. The high ratio limits the government’s options as too much stimulus could risk uncontrollable inflation.
COVID-19 Hotspots Will Continue To Make Economic Decisions Difficult
Despite China’s success in controlling the virus, its work is not 100% done. Hotspots have reemerged in the past month, and that has resulted in a new, fresh round of lockdowns. While many of these cases have come from people returning from abroad, they highlight the difficulty of containing the pandemic. Even if the government can eradicate the virus from one area, another might become a hotspot in a few months.
From an economic standpoint, this could mean that certain areas could have lower GDP if they become a hotspot. Factories that were running a few days ago could need to shut down abruptly to deal with a coronavirus outbreak. Investors and entrepreneurs in the Chinese market may want to keep this in the back of their minds as revenue streams could run into issues if a lockdown starts.
What Does This Mean For Entrepreneurs And Investors?
All of the above points are ways in which COVID-19 has impacted and will continue to influence China. As the original epicenter of the virus, the government has done a remarkably excellent job of controlling its spread. This job puts the country in a unique spot to emerge from COVID-19 as a leader.
However, since Wuhan was the unfortunate source of the coronavirus, China’s abilities to restart the economy will be hampered by political posturing from countries all over the world. Furthermore, higher-than-average unemployment, weaker consumer spending, contracting GDP, and a government spending more money with an already stunning high debt-to-GDP ratio, are all headwinds for making this economic return to normalcy a reality.
Therefore, smart investors and entrepreneurs will look for targeted opportunities to “buy on the dip” with businesses that are well-poised to emerge from this shifting reality unscathed. Companies that focus on online shopping, the Chinese consumer, and technology appear to be winners in a post-pandemic world. Businesses that rely on exports for survival are the ones that may have the most turbulence ahead of them.
Regardless, it is essential to remember that China has had an incredibly long unprecedented bull market. Even though GDP shrunk this last quarter, the same fundamentals that existed in 2019 exist even to this day. There’s no reason why China shouldn’t capitalize in a post-pandemic world and emerge from it more robust than ever.