For the manufacturing sector, firms could resume work today if their workers and suppliers are both local, but the firms must pass strict health and sanitation checks. For instance, enough face masks must be made available to workers, a difficult requirement for many employers, as local governments have been commandeering available face masks. Those labor-intensive manufacturers employing workers from all over the country will have to wait for longer.
We are very skeptical that corporate China would resume production as usual on 10 February (next Monday). The number of new cases is still rising rapidly at over 3,000 per day and there are signs that some places outside Hubei province are in emergency with a few cities toughening policies on mobility. Several cities in Jiangsu and Zhejiang provinces also announced very strict rules preventing residents from going out of their living compounds.
Comparing the coronavirus with SARS is not quite appropriate because the scope of quarantine is unprecedented. Several of our team members were in Beijing in 2003 and as far as we remember, the schools were shut down and the workers were told to work from home for a month. But the transportation service was still functioning and most other places in the country were working as usual.
China’s economy looks fine from a cyclical perspective, as data released last Friday suggest. Real GDP growth stabilized at 6% in Q4 2019, ending five consecutive quarters of deceleration, and most monthly indicators beat expectations in December. The continued recovery of automobile, electronic equipment and external demand will offer the tailwind through the next couple of quarters.
China’s financial regulators keep reiterating that raising capital is a top task for banks, especially the medium and small ones. This is necessary partly because Chinese banks need more capital to support its 12-13% loan growth, and partly because the People’s Bank of China (PBOC) wants to avoid more bank failures after bailing out three medium banks in 2019. The large scale of capital raising is positive from a cyclical perspective as it removes a key constraint for banks to lend more, but the downside is that some capital instruments are cross held.
Beijing continues to reform the state-owned enterprises (SOEs) in its own way in order to make them more efficient and powerful. It is expected that a new three-year plan for SOE reform will be released soon, as Vice Premier Liu He chaired an SOE reform meeting in November 2019 and announced to develop an action plan for the next three years.
The PBOC cut reserve requirement ratio (RRR) by 50bps in anticipation of liquidity withdrawal during Chinese New Year. It is rumored that banks are lobbying for another extension of transition period under the new asset management regulations. We think a three-year extension is too much, but a shorter one is likely.
Following the announcement of the Phase One trade deal, two things are confirmed based on the interviews and texts given by Chinese and US officials. First, the tariff escalation has paused for now and the US agreed to cut the September tariff hike of 15% on $120bn Chinese goods by half, to 7.5%.
As Beijing continues to carry on the de-risking campaign, more troubled firms are getting exposed and started to default in the domestic bond market. By the end of last week, the total amount of publicly-traded bond defaults was RMB 63bn in 2019, and it is on track to surpass last year’s RMB 69bn.
The trade war between China and the US has lasted for over 18 months and this has caused damage. China has suffered, but it is not losing very big yet. In fact, its current account surplus rebounds in 2019 and is on track to hit over $200bn (1.5% GDP) for 2019, defying speculations that the country was about to fall into current account deficit.
