How fast is China getting back to work?

Markets have become considerably more volatile after a surprise ‘price war’ erupted in the oil market. This occurred after Russia refused Saudi Arabia’s request to cut supply to support prices. In response, Saudi Arabia said it would increase supply and sell at discounted rates to squeeze out high-cost producers. The situation is extremely fluid and changeable on a daily basis.

China’s relative strength has been a puzzle, with February trading volumes 70% above the level for January and 45% above the average monthly level for 2019. A range of government entities, pension plans, sovereign funds, state- owned enterprises and private asset managers have clearly been called upon to perform national service. Retail investors were also active in anticipation of further government support measures; one new A-share fund launched in February raised an unbelievable $17bn in one day alone! Policy in China has also pivoted away from attempts to contain the virus towards re-starting the economy. With the 100th anniversary of the Chinese Communist Party approaching next year, President

Xi will be especially keen to deliver on his promise to double China’s 2010 GDP by the end of 2020. This will require growth of approximately 5.6% this year.

So how fast is China getting back to work? Data is mixed – and probably unreliable – but the Chinese economy was estimated to be working at around 60–70% capacity at the end of February, compared with 50–60% in the middle of the month. This is consistent with data suggesting that coal consumption for power plants has reached 68% of pre-holiday levels and that two-thirds of the workforce has returned in the first and second tier cities. Almost 95% of large companies in Shanghai are said to have resumed operations, working at around two- thirds capacity.

The scale of the short-term disruption to China’s economy was laid bare in the manufacturing PMI release, which dropped from 50 in January to 35.7 in February. This is the lowest level ever recorded for this index and its biggest one-month drop. (NB: China’s PMI series has been compiled since 2005; any drop below the 50 level signals a contraction in manufacturing activity). At the company level, data is still sparse and largely anecdotal.

We will have to wait until the first quarter or even first-half reporting season to get the full picture. Many companies are likely to experience working capital stress as receivables grow. The banks will step in to fill the gap here. Banks in China have already been instructed not to book virus-related defaults as non-performing loans.

What lies ahead in the coming weeks is highly uncertain and we stress the need for patience. An oil price war comes at a very sensitive time for the global economy as countries battle to contain the virus. The economic fall-out will largely be dictated by the success of containment, but a short-term impairment is inevitable. Within all of this volatility, there may well be some opportunities to buy some great businesses that fall victim to fear. We are watching developments very closely. 

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