Business | Economics
Lagging Global Demand Weighs on China
China’s nascent rebound from the historic contraction in the first quarter is already losing pace in April, amid signs of a global recession and still weak domestic demand.
Chinese GDP contracted YoY by 6.8% in Q1 2020, its worst performance since 1992. While domestic consumption may be on the uptick, largely driven by “revenge spending” and central stimulus initiatives, China is still an export-driven economy. Chinese manufacturing capabilities are largely back online; however, factories resume amid a sharp drop off in foreign demand.
China stands as the world’s second largest economy, largest exporter of goods, and the largest trading nation in the world. While nations across the globe struggle to bring their economies back online, it is unlikely that any meaningful global recovery will be seen until the G7 nations regain their footing in a post-coronavirus world.
Business | Economics
Supply Chain Strategies
While 70% of the American companies operating in China surveyed expressed that demand for their products had been impacted by the pandemic, over 70% said that they plan to retain their current production and supply chain operations in China, according to a joint survey by PwC and AmCham Shanghai.
24% plan to shift sourcing, while only 12% plan to shift production. This is a testament to the benefits that come along with producing in Chinese markets: low costs, high productivity, and a highly active consumer market. Many of these businesses are “in China, for China” — meaning that their goods are built in China and sold to the domestic market.
The overarching sentiment is best described by Ker Gibbs, President of AmCham Shanghai. He said, “Our survey results show that companies are considering adjustments to their business strategy, but there is no mass exodus as a result of COVID-19. Still, there is no escaping the fact that the current crisis adds a new and unwelcome dimension to the conversation about decoupling. This will be part of the discussion for months to come.”
Policy | Business | Economics
Tightening Export Restrictions
On June 9, 2020, the US will tighten export restrictions for certain sensitive technologies to China. US-China relations continue to sour amid geopolitical fallout, and this development will only contribute to the heightened tensions between the two largest trade nations on earth.
Under a new rule from the US Department of Commerce, the list of technologies that need to comply with licensing requirements will be expanded while the definition of “military end use” will be broadened to cover more technologies.
The DOC further notes that end customer due diligence will require extra attention, citing concerns over the close ties that the Chinese military has with private firms and SOEs. As for expanded restrictions, the list will now cover items including electronics, telecommunications, information security, and sensors and lasers.
While the future is uncertain, it can be inferred that the global trade environment will see heightened volatility in the coming months – and global businesses would do well to take cover.
Economics | Policy
China’s Infrastructure Play
After pushing back against stimulus for months, China is finally considering a CN￥4 trillion (US$565b) package that echoes its response to the ’08 Great Recession. Capital will be raised through special bonds at the local government level, with proceeds intended for infrastructure development. Infrastructure has long been an avenue for China to manufacture GDP growth, though state spending on domestic projects has reduced over past years.
President Xi has been an advocate of increasing SOE fiscal independence; however, the trade war and coronavirus has led to a reversal of policy. The PBOC has spent enormous resources in an attempt to clean up China’s banking sector – an industry plagued by high bad debt rates and pervasive shadow banking operations, and does not want to jeopardize its progress. As a result, China’s fiscal response to the coronavirus has been comparatively modest among the global community.
Despite doubtful profitability of these infrastructure projects, China has little choice but to pick from its old playbook among these unprecedented times.
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Business | Economics
Consumer (not) Spending
A People’s Bank of China (PBOC) survey reveals the harsh realities surrounding Chinese consumer confidence and spending habits in a post COVID19-era. Taken from a group of 20,000 urban bank-depositing individuals across 50 cities, the findings reflect a negative forecast for how the urban population feels about China’s current economic state.
Here are the results:
- 53% of urban residents are more willing to save, a 7.3% increase compared to the previous quarter;
- 25% of urban residents are planning to invest, a 1.3% decrease from last quarter;
- 22% of the group are looking to increase consumption, a 6% decrease from last quarter
Despite an intensive effort by Beijing and businesses to coax consumers into increased consumption, these numbers capture the reality that many are unwilling to quickly jump back into their usual purchasing habits. Instead, consumers are spending on education, medical care, and property investment.
As domestic consumption struggles to return to normal levels and foreign consumption continues to underperform, China will likely be playing a heavy-handed role for a while longer to ensure that the economy stays on the road to recovery.
Business | Markets
MNCs Adapt to Shifting Consumer Trends
In early post-lockdown China, MNC’s are taking clear measures to say ‘we are open for business,’ while cautiously innovating along the way to ease consumers’ fears:
- Hilton Hotels has identified “high touch” areas in guest rooms that provide the highest risk of contamination, and has focused additional efforts on deep cleaning;
- Ford recently developed a new app for Chinese consumers to increase car sales online, with a “zero touch” clean vehicle delivery service
All in all, measures like these have aided the return to normalcy, with numerous industries seeing work resumption rates jump 20% or more between February and March. Notably, non-essential industries like property construction and auto production resumed work at over 80% capacity in the month of March – though the sustainability of high work capacities at manufacturing facilities are still uncertain due to weak global demand.
Equity markets have rebounded in light of China’s soft re-opening, but Wall Street optimism is likely overweight. Even though Starbucks’ China locations have fully reopened, April sales figures still lagged by 35% year-over-year. The outlook for the travel industry is even worse; although 130 of 150 Hilton hotels have opened, occupancy rates hover around 20%.
Economics | Markets
Graduates Look to Beijing for Employment
Another looming topic is weighing on China’s mind – unemployment. While March unemployment decreased from 6.2% to 5.9%, researchers believe that urban unemployment may actually reach 10% this year. This figure may be further exacerbated when accounting for China’s significant migrant population, many of whom were at their rural familial homes during the outbreak and will have few – if any – SME jobs to return to in the city.
The pandemic has impacted many small and medium businesses, causing job postings to shrink by 30% and making China’s normally hyper-competitive job search even worse for recent university graduates.
Chinese officials are ramping up efforts to address this problem by opening more positions in the civil service and army, directing SOEs to increase recruitment, and rewarding firms that hire graduates. Local authorities have followed suit with a hands-on approach, launching recruitment websites for graduates and directly recommending graduates for job openings. As the dust settles from COVID-19, China will be firing on all cylinders to keep unemployment at bay and maintain social stability.
Business | Economics
Travelers Stay Local, Tighten Wallets
Over the weekend, China saw its first major tourist holiday since the country reopened. Some key observations were:
- During the Labor Day holiday that ran from May 1-5, China recorded 115 million tourist trips domestically, bringing in tourism revenue of CN￥47.56b (US$6.79 billion);
- That’s a 59.58% drop from the CN￥117.67b recorded for last year’s holiday, which was one day shorter, running from May 1-4;
- While overall figures fell short of 2019, online travel booking site Ctrip said car rental reservations rose 10% from last year
With many localities relaxing or canceling quarantine measures for most travelers, the government looked to the holiday as an indicator of consumer sentiment. Results showed that, while many consumers were willing to leave their homes, most trips were local due to the reservations that many still have towards long distance travel by air and lodging.
With the first major post-outbreak test in the review mirror, citizens and officials alike will look to infection data over coming weeks to determine the current state of China’s containment efforts and the country’s continued ability to return to normalcy.
Industry | Markets
Chinese Investment: the Capital Winter Catches a Virus
2020 is certain to be an arduous year for VCs around the globe; however, investors in China will emerge from the pandemic with a unique opportunity to invest in innovative companies at a discount. While China’s capital winter and coronavirus outbreak have shuttered the doors of countless startups, those resilient enough to have survived are likely to be positioned well to extend their industry influence and consolidate market positions.