Greater China's macroeconomic situation


Headline data

Forecasts for China's GDP growth during 2020 have been lowered by many economic consultancies. For example, the Economist Intelligence Unit (EIU) has lowered its real GDP growth forecast for in 2020 to 2.1%. This will reflect the continuing challenge of getting businesses back to full operation, the bigger than anticipated fall in Chinese exports during January and February, lower domestic consumption and the anticipated fall in global demands as COVID-19 outbreaks spread around the world. The EIU has also downgraded their global GDP growth forecast to 1.9 percent.

COVID-19 poses a threat to three main sectors of China's economy:

  • The service sector, especially such consumer industries as tourism, catering, entertainment and logistics (particularly for small and medium sized enterprises).

  • The manufacturing sector, typically in the mobile phone, car and electronic industries – due to indefinite time for return to operations, which may to some extent disrupt the global supply chains.

  • The trade sector, due to the reductions and cancelations of flights, and sea routes and borders restrictions.

Analysis by Trivium China's National Business Activity Index indicates that the Chinese economy is operating at 73.6% of normal output. This can be further broken down to large companies at 75% and SMEs at 72.7% of their typical output. Chinese government estimates are higher. It is clear that significant progress has been made to getting back to full operation, but full capacity utilisation is being held back by labour force and supply chain constraints. In order to reach 100%, a recovery in consumer demand is also necessary.

Resumption rates for business vary across China's provinces and municipalities. For example, resumption is estimated by Trivium China to be at or near 100% in Guangdong, Zhejiang, Shandong and Shanghai, while Beijing is currently estimated at 76%.

For the January-February period some indicators year-on-year drops are the largest on record:

  • Industrial production down 13.5%

  • Retail sales declined 20.5%

  • Fixed asset investment declined 24.5%

Local governments are implementing measures to help boost consumption. The Nanjing city government, for example, has distributed e-vouchers worth RMB 318 million (NZD 75m) that can be used as restaurants, gyms and electronics or book retailers. The central government is also focusing on boosting consumption through the rollout of a range of policy measures.

Business impacts

The current situation is particularly challenging for SMEs due to the pressure it puts on cashflow. A February survey of SMEs in China highlights that a third of the companies responding only had enough cash on hand to cover fixed expenses for one month, with another third running out by the end of the second month.

On March 13, the China Enterprise Confederation (CEC) announced results of their survey of the performance of 299 large manufacturers during February. One-third of the companies were SOEs and the remainder were from the private sector. More than 95% of the companies surveyed reported a revenue drop in Q1, with 80% also suffering an increase in operational costs. Unsurprisingly, 97% reported a decline in profits, and it is fair to assume that many will be concerned about their ability to survive without better performance in Q2. The challenges remain increasing costs, disrupted supply chains and disrupted sales.

Sales by China's property developers also declined strongly during February – down 38% year-on-year, based on a CRIC survey of the largest 100 companies in the real estate sector. Part of the reason for the decline was the need for real estate companies to close many of their sales offices during February because of local government guidelines. This has prompted companies to get online sales showrooms up and running. It is worth noting that the infrastructure and real estate sectors, which have often been turned to in the past as growth engines for the economy, will benefit from government stimulus over coming months.

Consumption

China's Purchasing Managers Index (PMI) for February was at its lowest level in 35 years. Whilst official consumption data still isn't available, one forecast is for a decline in goods and services consumption in the vicinity of 10% during February. The drop will have been most severe in China's large Tier 1 and Tier 2 cities, which have large manufacturing and service industry bases that were impacted by quarantine measures, plus also account for 50% of China's retail market.

Looking specifically at goods consumption, automotive and catering are two sectors where companies suffered drop-offs in sales of up to 90% during February. In contrast, sales of daily necessities and medical goods benefitted from some consumer stockpiling during February. The services sector also did comparatively better with expenditure increases expected for telecoms and online services (education, gaming, medical etc).

Imports and exports

Data from China Customs is starting to paint a picture of the impact of the extended Chinese New Year holidays and COVID-19 on imports and exports. For the first two months of 2020, China's total exports fell by 17.2% in value terms to USD 292.4 billion and imports declined 4% in value to USD 299.5 billion. This small trade deficit is in sharp contrast to a surplus of over USD 41 billion for the equivalent period in 2019.

Government and business response

China's Central Bank has boosted access to low cost loans through six major state-owned lenders, as part of a move to ease pressure on businesses hit hard by COVID-19. RMB 300 billion (NZD 60 billion) will be provided in low-interest loans to companies short-listed by 10 provincial and municipal governments. Banks participating in the programme include the Industrial and Commerce Bank of China, Agricultural Bank of China, Bank of China and the China Construction Bank.

The government has been accelerating the issuance of special bonds in order to boost spending at the local government level. Approximately RMB 950 billion (over NZD 200 billion) of new special bonds have been issued in the first two months of the year, and this is over 70% of the expected annual quota for 2020. Special bonds are normally used for infrastructure, utilities and transportation in urban and rural areas.

In another move to support manufacturers, two major power distributors will offer an average of 5% discount on electricity rates to most of their business customers regardless of size (but excluding the largest electricity consumers). The discounts will be in place through until the end of June 2020. The estimated total value of these discounts is RMB 44 billion (approximately NZD 9 billion).

Advice to exporters

Look at your market strategies and where you might want to diversify, including within China itself.

As part of this, shift your business plan to a medium-to-long-term perspective, keeping in mind mega-trends which are unlikely to change, such as the growth in the 'middle-class' consumer category.

Use the time to investigate your consumers in China and identify where you may need to diversify product offerings.

Examples of sectors that could potentially rebound more quickly during a market recovery are seen to be:

  • Infrastructure (assuming government stimulus)

  • Logistics (watch digital capability)

  • Gaming

  • Digital media

  • Software

  • Online entertainment

  • Online education.

Further insights

COVID-19 Implications for Business: McKinsey & Company, March 2020

Purchasing Managers Index Declines Sharply: China Daily, 2 March 2020

Travel Industry Update: CNN, 2 March 2020

Macroeconomic Impact of China's Epidemic and Policy Suggestions: PwC China, 11 February 2020 (Chinese language)


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