China 2020 Outlook – After COVID-19, a stronger recovery is coming March 20, 2020 1434

  • The COVID-19 outbreak in China is beginning to be under control, with limited new cases recently. We expect the economy to recover in 2Q20.
  • We are OVERWEIGHT on the China brokerage and infrastructure sectors due to the improvement of daily stock turnover and favourable policies for brokerage companies and increasing issuance of special bonds for infrastructure.


Epidemic in China: Situation is under control

From Figure 1 and 2, We believe that the epidemic situation in China is under control and compare to worldwide, the epidemic will have less effect on Chinese economic in 2Q 2020:

Source: Wind, PSR

Note:  the sharply increase on February 12th was due to the change of diagnosed definitions, and it came from accumulate cases since January


Impact on China Macroeconomy: Big rebound in 2Q 2020

To estimate how COVID-19 will affect the Chinese economy, we take the 2003 SARS outbreak as a reference. We believe SARS and COVID-19 both have an impact on the consumer industry because of its major impact on population movement and gathering.

But do note that SARS and COVID-19 differ a regional scope and duration. Compared to SARS, COVID-19 is more infectious, but different from 2003, China government was taking the stricter measure to prevent the spread of disease, the duration is relatively short.


The Figure 3 shows the GDP growth in 2002 to 2004, given the SARS mass outbreak happened in 2003 March and relieved in 2003 May, we notice that the GDP growth in the 2Q 2003 dropped from 11.1% in the 1Q to 9.1%, and recover in 3Q, also the tertiary industry took more time to recovery.

From the 2003 case, we can conclude that the trend of GDP growth is highly relative to the timeline of the epidemic, the impact to China GDP was only temporary and the epidemic has a bigger impact on the tertiary industry.

For 1Q 2020, from January to February macro data, we observed production, investment and consumption were seriously affected by the epidemic, both consumer and investment growth rate dropped more than 20% YoY.

In March, with the resumption of production and the recovery of consumption, we expect the economy will gradually recover. The resumption of production in March has been rebounded rapidly. We observed the weekly consumption of power recovered to 90% of the same period of last year. Some provinces like Zhejiang and Jiangsu have reached 100%.

For 2Q 2020, driven by positive policies, we believe the economy will rebound significantly. We believe the active fiscal policy will play an important role in 2Q, within increasing special debt quota, we believe it will effectively promote repair of infrastructure investment. We believe that the infrastructure investment will be the main driver of economic growth this year.

For 2020’s GDP growth target, we believe that it is hard for China to reach this year’s economic growth target of 5.6%. For the China government, it is more important to stabilize employment than to ensure growth.


Impact on China A – Share Market: Positive on Brokerage and Infrastructure

In 2003, SARS has big impact crossing industries, mainly through several chains, of which consumer industry was the most significantly affected and lasts longer in each industry.

In terms of GDP sub-data, 2Q output value of transportation, accommodations and finance in 2003 was most significantly affected by the epidemic (Figure 4).

From the perspective of the performance of listed companies, industry profits were more sensitive to the epidemic, and the performance of transportation, consumer services, real estate and post cycle (household appliances), agriculture, non-bank finance fluctuated greatly in 2Q and 3Q 2003 (Figure 5).


From the perspective of the duration of the impact, consumer services and retail were negatively affected for the longest period.



Finance Industry: Brokerage companies’ profit up 21% YoY

On February 25, 2020, the turnover of A-shares exceeded RMB 1.4 TN, the highest one-day turnover since August 2015. In February 2020, the turnover of A-shares reached RMB 19.63 TN, up 122% YoY and 75% MoM. In the first two months of 2020, 29 listed securities companies achieved total operating revenue of RMB 42.135 BN, up 18% YoY, and net profit of RMB 17.729 BN, up 21% YoY.


Consumer Services: retail sales growth dropped below 0%

In the first two months of 2020, the total retail sales of consumer goods fell by 20.5% YoY, and the auto consumption down 37% YoY.  On the contrary, online retail sales of physical goods increased by 3.0% YoY. After the outbreak of COVID – 19, the income of the catering industry dropped significantly by 43.1% YoY.


Real estate: Same story like 2003

In the first two months of 2020, real estate investment decreased by 16.3% YoY, the construction area increased by 2.9% YoY; the completed area decreased by 22.9% YoY, and the newly started area decreased by 44.9%.

From January to February, the growth rate of land acquisition area and price dropped 29.3% YoY and 36.2% YoY respectively. The sales area decreased by 39.9% YoY, and the sales volume decreased by 35.9% YoY.

Infrastructure: infrastructure investment decreased by 30.3% year on year.

In the first two months of 2020, infrastructure investment (excluding power) decreased by 30.3% YoY.


Investment Actions

We are OVERWEIGHT on the China Brokerage Sector and infrastructure Sectors.


Brokerage:  improvement of daily turnover and favourable policies

Compare to other industries, the impact of the epidemic on the securities industry is relatively small. In addition to the improvement of the daily turnover, the favourable policies of liquidity easing and capital market reform have been implemented in March, which we believe will benefit securities companies’ business in investment bank refinancing.

Infrastructure: will be the main driver of economic growth this year, we expect to see a rapid rebound in the future.

In the first two months of 2020, the issuance of special bonds reached nearly a trillion yuan, far exceeding the level of the same period last year. We believe the decline of infrastructure investment is mainly caused by insufficient construction. With the gradual of the follow-up enterprises’ resumption of work, the impact of the supply side will gradually weaken. As infrastructure investment will be the main driver of economic growth this year, we expect to see a rapid rebound in the future.



About the author

Profile photo of Zheng Jieyuan

Zheng Jieyuan
Research Analyst
Phillip Securities Research

Zheng Jieyuan is a research analyst in Phillip Securities Research, focusing on the China and Hong Kong markets as well as China stocks listed in the US.

He holds a Master Degree in Finance from Nanyang Technological University (NTU), and Bachelor Degree in Information and Computing Science from Minzu University of China.

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