China Economic Update 2020 Q1
China’s economy recorded the first contraction in decades in the first quarter of 2020 as the COVID-19 outbreak shut down large parts of the world’s second-largest economy and dimmed the global outlook. China’s Gross Domestic Product (GDP) shrank 6.8% year-on-year in Q1 2020; the worst performance since at least 1992 when official releases of quarterly GDP started.
The Caixin China General Manufacturing PMI index, an important indicator of the strength of the Chinese economy, rebounded to 50.1 in March 2020 from a record low 40.3 in the previous month, indicating limited improvement in manufacturing activity after widespread economic stagnation in February. Production has recovered as more firms reopened following widespread shutdowns and travel restrictions in February amid the peak of the COVID-19 outbreak in China. The service economy is having more challenges with recovery, but the industrial economy has rebounded in March after weak results in February.[i]
YoY growth of the industrial enterprises with an annual income of over 5 million RMB
The Trivium National Business Activity Index shows that as of April 10, China’s economy was operating at 81.8% of typical output. Even though manufacturers are getting back to work, the manufacturing sector is still under pressure with the situation worsening overseas. External orders will decline for most sectors not related to medical devices or the sourcing of Personal Protective Equipment (PPE), which has seen a surge of activity.
With regards to currency exchange rates, CAD/CNY was on a downward trend in Q1 2020, compared to Q4 2019. The exchange rate fell below 5 RMB briefly on March 17 but returned to a level just above 5 shortly after. The CAD will experience ongoing downward pressures related to the crash in oil prices, ongoing lockdown policies in Canada, and the challenges of returning to a new normal with rising unemployment rates and company bankruptcy filings.
2020 Economic Outlook
The Economist Intelligence Unit (EIU) under the Economist Group has revised its forecast for real GDP in China for 2020 to a 1% growth, from a 5.4% growth previously. The adjustment reflects the expectation of an economic recovery later into the year, but one that will be impacted by the ongoing spread of COVID-19 overseas which will drag down external demand. Similarly, the International Monetary Fund (IMF) World Economic Outlook has the 2020 GDP growth of China predicted to be at 1.2%. Year-end growth expectations will still need to be mitigated by the possibility of a second wave of COVID-19 outbreaks and the potential return of lockdown measures. Real GDP growth is expected to rebound strongly in 2021, in part due to the unusually low base of the annual comparison.
With regards to the potential V-shaped recovery, according to a survey of household finances done jointly by Southwestern University of Finance & Economics and Ant Financial, while under lockdown 50.2% of households increased savings and reduced consumption, 9.4% reduced savings and 40.4% experienced no change.[ii] Consumers have been holding back from spending those savings over concerns that a return to public spaces might expose them to a new outbreak, that their jobs and incomes might not be secure, and that price inflation might emerge. Consumption driven recovery will be challenged by those factors, where it is difficult to expect consumers to go out and spend like they had in the past.
A rebound in real estate transactions will be challenged by growing unemployment strains, which will affect the ability of households to put down deposits or take on mortgages. Banks will be adverse to expose themselves to risky lending, making it harder for some households to qualify for those mortgages.
For the government measures to support recovery, a priority for fiscal and monetary policy has been to put support in place to help credit-stressed companies and regions facing repayment difficulties. According to the IMF, an estimated RMB 2.6 trillion (CAD 517.1 billion) of fiscal measures or financing plans have been announced, of which 1.2 percent of GDP are already being implemented.[iii] The government has been focused on measures that allow savings for companies through reduced social security contribution rates, rent cuts for state-owned properties and the promise of cheap loans for private enterprises. The government has increased spending on epidemic prevention and control, increased production of medical equipment, and accelerated the disbursement of unemployment insurance. The Chinese central bank specifically mentioned helping SMEs, and implemented targeted cuts to the Reserve Rate Ratio (RRR), along with reductions to the Loan Prime Rate (LPR). Structural issues in the banking sector, however, mean that many SMEs continue to struggle to access credit via official financing channels. Comparatively, the support announced by the Chinese government has been smaller than in other countries. Past announcements have indicated a resistance for large stimulus measures, and a pursuit of more targeted approaches.
The Construction Sector
According to the National Bureau of Statistics of China (NBS), the average new home prices in China’s 70 major cities edged up 0.13% in March 2020 from the previous month, suggesting some pent-up demand as lockdown policies are relaxed and the population is allowed to move around and have more access to visit residential compounds. From early March, there was a drive to get projects back into operations with the People’s Daily announcing the reopening of 79% of major construction sites in China as of March 13.
The 2020 Urbanisation Plan, released in April, should also help to underpin price gains in smaller markets with authorities in cities that are home to fewer than 3 million residents ordered to eliminate barriers preventing rural migrants from applying for urban residency permits (hukou).
Total investment in real estate in China had a decrease of 7.7% in March year-on-year, rebounding from a 16.3% decrease of investment in February.[iv]
The total floor area completed in China in Q1 2020 was at 485 million m2, down 27.3% compared to the 667 million m2 completed in Q1 2019.[v]
China Wood Imports
According to the China Bulletin, softwood log stocks at China’s main ocean ports totalled 7.1 million m3 at the end of March, for a growth of 0.4% from February. Radiata pine log stocks recorded a decline of 3.6%. European spruce log inventories totalled 1.7 million m3, up 14% from the prior month.
Softwood lumber stocks in the Taicang Port totalled 1.5 million m3 at the end of March, up 300,000 m3 (25%) from February. SPF inventory amounted to 200,000 m3 (down 100,000 m3). Most softwood lumber prices have experienced increases of US$ 5-30/ m3 on new offers.
Prices had dropped in January, reflecting the quarantine and lockdown measures that had started from mid-January. The return to activity in March and early April shows a return to Q3-Q4 2019 price levels