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27 April 2020 | GSAM Connect

China: The Road to Recovery

Economic activity in China is normalising - policymakers continue to support domestic growth

As the daily new COVID-19 cases continue to decrease, China has gradually eased lockdown restrictions. This includes re-opening factories, roads, schools, malls and restaurants and has coincided with a recovery in economic activity toward normal levels.

Locally transmitted cases are approaching zero but there is risk of a second wave through people importing the disease from abroad. China has rigorously employed its three-line defence system at the border which includes surveillance at entry points, a mandatory 14-day quarantine and an immediate medical diagnosis for symptomatic passengers arriving on flights. China has also suspended the entry of most foreign nationals, and placed limits on foreign and domestic airlines.

We expect Chinese policymakers will continue to employ a multi-pronged, disciplined and incremental response to provide support for economic activities, but no “big bang” of easing measures. Going forward, we expect policymakers to demonstrate a heavier focus on demand stimulus and are encouraged by these developments of employing both supply and demand-side policies.

Industrial activities have led the recovery while commercial/consumption activities appear to be lagging [1]

Daily IPP Coal Consumption Index
Daily Passengervolume in Subways of 6 Major Cities

[1] Source: CICC Macro Research, GS GIR, as of 29-Mar-2020. Top chart: LNY refers to the Lunar New Year. Daily IPP coal consumption index at 76.5 indicates that the consumption volume stands at 80.8% as of its pre-LNY level. Average of 3nd week before LNY is 100. Bottom chart: Six major cities are Shanghai, Guangzhou, Chengdu, Nanjing, Suzhou and Zhengzhou. 

The impact of the pandemic across different sectors of the Chinese market

The industrial sector has led the economic recovery, with materials and labour now back in place. Higher frequency indicators have shown that industrial-related activities such as coal consumption, freight logistics activity, steel demand and property sales have all continued to recover and are now near historically normal levels.

In healthcare, sub-sectors have been impacted differently as demand for testing kits and medical equipment has been explosive, continuing to surge as the pandemic spreads globally. Pharmacy sales were also boosted by demand for personal protective products, health supplements and prescription drugs. However, as patients avoided hospitals and delayed non-critical surgeries, demand in these areas lagged.

We expect the outbreak to drive an increase in healthcare spending and serve as a catalyst to jumpstart overdue reforms and re-investment in the healthcare sector.

The lockdown has been a tailwind for user growth in online services and e-commerce. Entertainment services, such as gaming and streaming have enjoyed faster growth with people at home. In addition to gaining more users accustomed to shopping online, e-commerce players are benefiting from the acceleration of offline merchants moving online. We believe this meaningful increase in the short-term has a long runway for growth.

Comparatively, the services sector and consumption are lagging based on “soft data” and proxy indicators, such as traffic. Traffic congestion in major cities has risen over the past few weeks but still remains ~10% below average; subway ridership has remained subdued at ~41% below average. This suggests that regular activities and consumption have not yet fully normalised. As malls, restaurants and schools re-open, we believe traffic and consumption will gradually improve.

Investment opportunities in China as a result of the pandemic

Investment opportunities in China actually remain the same, though with new risks and opportunities. Our three key areas of focus include:

  • Consolidation of “old economy” sectors and the emergence of competitive national brands
  • Fusion of online-offline business models improving service sector productivity
  • Technology catch-up via innovation and market-oriented competition

At GSAM Fundamental Equity, we are long-term, fundamental bottom-up investors focused on investing in sound businesses trading at a discount to intrinsic value. We believe that the elevated market volatility will create interesting buying opportunities for active investors with a long-term investment horizon. We continue to monitor the market closely in an effort to identify opportunities.

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