As it struggled to control the level of contagion, China mandated factory shutdowns across most of its provinces. With Chinese authorities imposing restrictions on movement and businesses extending Lunar New Year shutdowns, China's output supply chain came to a standstill. New orders and employment fell at the steepest rates on record while exports shrank sharply on the back of shipping restrictions and order cancellations.
Although business activity in March entered into a recovery phase and the number of new cases in China, the epicentre of such epidemic, appeared to be easing, the virus accelerated elsewhere posing a downturn in foreign demand and decreasing the likelihood of quick V-shaped recovery. Albeit the improvement witnessed at the end of the first quarter, as it fought the COVID-19 pandemic, the world's second-largest economy suffered its worst economic contraction since records began in 1992.
Following a six per cent growth in the last three months of 2019, the Chinese economy shrank 6.8 per cent year-on-year, after the authorities employed a near two-month-long shutdown of all non-essential business activity to mitigate the spread. Notably, the industrial and services sector experienced a 9.6 and 5.2 per cent drop respectively.
Albeit first to succumb to the COVID-19 outbreak, China's economy, after a historic first-quarter slump and following an industry-powered rebound is proving to be the fastest to recover. China's economy is now pointing towards the prospect of being the only major economy to experience expansion this year with the International Monetary Fund (IMF) forecasting growth of 1.2 per cent and above five per cent thereafter, until 2025 – well ahead of any other major economy. In-line with the latter, yet portraying a more optimistic scenario is an economist survey by Bloomberg, forecasting growth in the region of two per cent.
Supporting these views is the most recent economic data. Although from a demand-supply perspective, the demand side lags behind supply, this being mainly due to the unbalanced recovery coming from other nations still battling with the pandemic and facing the inevitable need for restrictions to once-again mitigate the contagion, key economic indicators in July maintained the recovery momentum, extending the recovery to the second half of the year.
Retail sales, a gauge of consumption growth, increased by 0.85 per cent month-on-month to reach 3.22 trillion Chinese Yuan in July, maintaining a six-month streak of constant expansion after a contraction of 10.91 per cent in January.
Other key economic indicators, notably the industrial and services sectors, the latter making up almost 50 per cent of China's GDP, also showed signs of a rebound. In July, China's value-added industrial output rose by 4.8 per cent year-on-year, below market consensus of 5.1 per cent. Among major industries, production grew for machinery, communications, general equipment, and ferrous metals. Meanwhile, the production of transport-related goods dropped by 1.4 per cent.
Also, reflecting a bounce in activity after a sharp contraction earlier this year when the authorities imposed restrictions on movement due to the pandemic is July's factory activity, which expanded at its fastest rate in almost a decade. China's manufacturing PMI rose to 52.8 from 52.1 in the previous month, beating market expectations and pointing to the third consecutive expansion.
Meanwhile, services PMI fell to 54.1 in July from a 10-year high of 58.4 in June, pointing to the slowest expansion in the current three-month sequence of post-coronavirus recovery. Albeit maintaining expansionary levels, new export business dropped sharply into a contraction territory as the pandemic continued to hit other nations hard.
Lastly, in July, China's unemployment rate – still hovering at levels higher than those witnessed before the COVID-19 pandemic, remained unchanged over the previous month, at 5.7 per cent.
In a bid to further alleviate the economic environment, and thus encourage increased spending and investment, through a medium-term lending facility, the People's Bank of China added a further 700 billion Chinese Yuan of one-year funding, to further tackle the economic fallout of the COVID-19 pandemic.
Although geopolitical risks remain – surrounded by the prominent US-China trade war over tariffs imposed to reduce unfair trade practices, we believe that the downward spiral in US-China relations, likely to worsen in due course, shall not derail China's economic recovery.
Should China succeed in keeping the COVID-19 pandemic under control, the forecasted V-shaped recovery shall transpire.
Disclaimer: This article was issued by Christopher Cutajar, credit analyst at Calamatta Cuschieri. For more information, visit https://cc.com.mt/. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.