As the first country to shut down and subsequently re-open its economy, all eyes are on its trends and areas of investment potential
As the first country to shut down its economy upon the onset of COVID-19, all eyes will be on China to see how the world’s second-largest economy emerges from the pandemic. Its important role in helping kick-start the global economy is obvious.
Policymakers have been more restrained in terms of stimulus compared with the U.S. and European Union. Rather than flood it with credit, they have instead sought to stabilize, focusing on domestic spending and unlocking the significant savings of the country’s population. This has been vital, especially given the tensions with America.
Stephen Green, Capital Group economist, said China’s industrial economy is largely operating back at normal levels, and leading activity indicators such as trucking volumes, electricity production and weekly cement shipments are mostly back to 2019 levels or higher. However, he warned the return of growth will be slow and gradual.
“Industrial profits remain weak, and China’s exports could decline as much as 20% to 30% on a year-over-year basis, though so far, exports are holding up surprisingly well,” he said.
“Consumption is generally lagging due to elevated unemployment levels and fears of possible pay cuts. The majority of households report in surveys that their incomes are down year on year. People still seem to be reticent to leave their homes, and some of this is reflected in data for travel and dining, which are well below 2019 levels.”
Capital’s research suggested that China’s economy contracted far more in the first quarter than the government’s official 6.8% decline. Green anticipated China’s economy will see no growth for all of 2020, which contrasted with the sell-side consensus forecast for modest GDP growth.
Beijing is launching a mini-fiscal stimulus package, which could amount to five percentage points of gross domestic product, compared with 10 percentage points following the 2008–2009 global credit shock. Green added: “This could be enough to stabilize China’s economy in the second half of 2020 and provide some support to growth in 2021; it usually takes 12 to 18 months for credit to work its way through the economy.”
Meanwhile, Capital Group portfolio manager Chris Thomsen believes local champions will begin to emerge in technology and healthcare, especially given the country’s trend to procure goods and services from within China.
There are three areas he believes are worth particular attention:
Cloud computing
China has lagged the U.S. in adopting cloud-based technology but working from home has changed the dynamic significantly. Thomsen said: “An emerging participant is Kingdee International Software Group, which competes against Germany’s SAP and U.S.-based Oracle.”
Semiconductors
China is keen to strengthen its capabilities in the field as part of a broad plan to become more self-sufficient in key areas of technology. Thomsen added: “Silergy Corporation, which designs and manufactures a broad range of high-performance analog integrated circuits and is gaining share in China’s chip market, may benefit as the market is projected to grow substantially with demand for 5G and cloud-computing applications.”
Biotechnology
Through their internet-based platforms, Tencent and Alibaba have seen a massive surge in activity for their health care services, with people connecting to doctors on their mobile devices. There are also Chinese biotechnology companies developing vaccines for COVID-19.
Thomsen said: “Overall, China’s aging population and demand for higher quality services from private sector hospitals could present intriguing opportunities for investment in the years ahead.”
