Starting before the Lunar New Year in January the Chinese government’s heavy-handed measures fighting the coronavirus, including a lockdown on 60 million people in Hubei province and strict quarantine of hundreds of millions of people, have brought China’s economy to a near standstill.

In a sign of the situation is under control, China has stepped up efforts to ramp up production and to minimize the economic impacts caused by the coronavirus outbreak.

What is the progress on production resumption in China?
In the first week of March estimated production level outside Hubei province reached 60%-70%. As more areas are abolishing travel and transportation restrictions, production should be normalized by mid- to-late March.

Production resumption varies across regions, industries and enterprises. By region, majority of provinces on the Eastern coast have achieved a resumption rate of over 90%, while heavily-infected areas such as Hubei province still focuses on virus control.

Majority of provinces on the Eastern coast have achieved a recovery rate of over 90%

By industry, financial and IT sectors have much higher reopening ratio, however basic materials sector is slow in restarting work. Over 90% of China’s State-Owned Enterprises (SOEs) have resumed production, but Small and Medium Enterprises (SMEs) still face difficulties to reach full-production.

What is the impact on China’s economy?
The disruption in production and consumption in January and February will lead to a slowdown in China’s economic growth in 1Q 2020.

This should be followed by a strong rebound in 2Q 2020 on quarter-on-quarter base. With gradual production normalization the Chinese economy is expected to revert to the pre-virus track toward the end of the year, with full-year growth rate reaching 5,7% in year-on-year term.

On the economic drivers, monetary and fiscal easing to boost growth is underway. Consumption could see a compensatory pick-up. The domestic and overseas inventory restocking after the production disruption is likely to support demand.

Slowdown in 1Q2020 and rebound in 2Q2020

One man’s loss is another man’s gain. While the coronavirus outbreak caused economic downturns in the catering-, retail-sales- and tourism industry, it also triggered opportunities for the other industries, such as E-Commerce, online-learning and online-entertainment etc. “Less offline, more online; less human, more automation” is a strong trend across businesses.

Although the Chinese economy seems on its way of normalization, the clouds of uncertainly remains on the horizon. The duration and seriousness of the coronavirus outbreak outside China is highly unpredictable at this stage. Intervention by governments in different countries could cause reduction in extern demand.

After all the coronavirus is a one-off negative shock for the Chinese economy, but China’s long-term growth trends are intact.

With the Courtesy of Erste Asset Management. The article first appeared here.

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