China is gradually getting back to work after the coronavirus pandemic extended the Lunar New Year holiday. Our ‘work resumption barometer’ had a reading of 65 on 25 March – 60 days after the New Year - up from below 20 at the 14-day mark.
Local governments have been seeking a balance between containing the spread of the virus (and being prepared for a possible second outbreak) and helping companies resume production as quickly as possible.
Our barometer is based on metrics such as traffic congestion, air quality, coal consumption, and property sales. The reading of 65 suggests that work-resumption levels are around 85 per cent of the year-on-year average of the previous two years. We expect a full resumption of work by the end of April or early May.
In 2019 all migrant workers had returned to China’s large cities by the third week after the New Year holiday; this year only 36 per cent had returned but after 56 days (20 March) the figure was 86 per cent. This accords with the government’s strategy of enabling an orderly return to work in stages to reduce the risk of spreading the virus.
The rate of work resumption varies in different sectors. Banks, software and online entertainment are generally working again. Upstream sectors such as cars, feed products, infrastructure and industrial production are doing significantly better than downstream service sectors, including restaurants, hotels, transport, tourism and cinemas.
The exceptions are car-dealers and property sales outlets. State-owned enterprises are doing much better than small firms and private enterprises, which face greater difficulties resuming production.
Demand for cloud office services increased significantly during February, led by the education, IT and healthcare sectors. Companies with a high degree of digitisation have benefitted from the flexibility offered by remote working.
But while China is gradually returning to work, many businesses face a slump in demand, domestically and overseas. February’s retail sales of consumer goods were 20.5 per cent lower than a year earlier with clothing, furniture and car sales down more than 30 per cent.
As of 21 March, overall traffic was down 61 per cent and road, rail and aviation experienced traffic drops of 59 per cent, 66 per cent, 72 per cent respectively. Moreover, for the IT hardware sector, many orders are likely to be cancelled in the coming months.
HSBC is forecasting China’s GDP will contract by 5.5 per cent year-on-year in the first quarter of 2020 and grow only 3 per cent in the next three months. A more meaningful recovery is likely only from the third quarter.
Exports have accounted for 17 per cent of GDP in gross terms and a large negative trade shock is expected to dash hopes of a quick normalisation of economic activity.
Sectors dependent on exports or exposed to the international supply chain – including garment and toy manufacturing, electric-vehicle components and solar products – also face uncertainties from the global disruption. With many countries in lockdown, supply-chain disruption and procurement delays heighten the downside risk to demand recovery.
The garment and clothing sector has already seen a 33 per cent decline in domestic sales compared with February 2019.
Many factories claim that their biggest problem now is declining orders rather than delays in resuming production, and as COVID-19 spreads globally, the overseas consumer market will suffer.
First published 27 March 2020.
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The following analyst(s), economist(s), or strategist(s) who is(are) primarily responsible for this report, including any analyst(s) whose name(s) appear(s) as author of an individual section or sections of the report and any analyst(s) named as the covering analyst(s) of a subsidiary company in a sum-of-the-parts valuation certifies(y) that the opinion(s) on the subject security(ies) or issuer(s), any views or forecasts expressed in the section(s) of which such individual(s) is(are) named as author(s), and any other views or forecasts expressed herein, including any views expressed on the back page of the research report, accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Steven Sun
Equities: Stock ratings and basis for financial analysis
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