AXA IM: Commentaar Aidan Yao op recente ontwikkelingen COVID-19 in China

AXA IM: Commentaar Aidan Yao op recente ontwikkelingen COVID-19 in China

China
China

Onderstaand het commentaar in het Engels van Aidan Yao, Senior Econoom China bij AXA IM, op de laatste ontwikkelingen van COVID-19 rondom China en de economische impact.

Daily confirmed (excluding asymptotic) cases hovered at around 30 last week, with imported infections accounting for 96% of the total. The NHC has also started reporting asymptotic cases since April 1, which saw 304 new infections, with 106 imported over the past week. Daily lives continued to normalize as social restrictions were lifted. Some tourist sites reopened ahead of the Qing Ming festival, attracting record number of visitors over the weekend. Wuhan also continued to thaw after 2½ months of freeze, with traffic flows picking up moderately from a depressing base. A growing sense of normalcy in ordinary people’s lives is now evident – judging based on the postings from families and friends on social media, although the constant news of imported and asymptotic infections has not gone unnoticed. The latter will likely have a lasting impact on people’s behaviour in their social and economic engagements for many months to come.

After a decent pick-up in activity, the pace of economic normalization stalled last week. The percentage of LNY returners rose only 1 point to 87%, while the level of traffic congestion (90.9% of normal) and subway passenger volume (c60%) actually dipped relative to the prior week. An update from a broker’s channel check confirms the official data that the resumption rate among large corporates has risen above 90%, implying a rapidly vanishing supply shock. The problem has now shifted to the demand side, with external-facing companies, in particular, struggling to cope with cancelled export orders as DM economies grind to a halt. Domestically, services businesses that are labour-intensive and require customer-facing are also struggling to get back on their feet. A recent study by Meituan – a major online platform for consumer services – shows that while 76% of contracted firms have resumed operation, consumption of such services has reached only 39% of normal levels.

The implication for Beijing is that the progress in work resumption – due to supply normalization – may be close to as good as it gets. What drives the remaining wedge between the current and “normal” level of production is a shortage of demand, which can be addressed with the help from counter-cyclical policies. This underscores the call from the recent Politburo meeting for more forceful policy easing, which led the PBoC to deliver another 100bp targeted RRR cut, and slash the interest rate on banks’ excess reserve by 20bps – the first move of its kind since the GFC. The central bank has also beefed up its capability to support SMEs by adding another RMB1trn to its relending facility. However, compared to the Fed and ECB’s shock-and-awe approach, the PBoC has continued to show caution in flexing its monetary muscle with only targeted easing so far. This reflects Beijing’s reluctance to engage in another aggressive monetary stimulus, akin to the 4trn post the GFC, which brought an unsustainable trade-off between current and future growth. We think the burden of the economic bailout will fall on fiscal policy this time around. After exhausting the corporate balance sheet to fight the GFC and the household balance sheet to arrest the 2015-16 slowdown, Beijing seems to have little choice but to throw its own weight behind the “policy put”. Hence, while we expect more monetary easing to come, it will be the upcoming fiscal and quasi-fiscal measures that set the tune for this round of the economic rescue. Stay tuned for more announcements in this area in the coming days/weeks.