China’s Long Road to Recovery

Commodities, Investing Psychology, Politics, Stocks Mar 20, 2020 / Reading Time: 2 mins
By Aditya Kapdi Reading Time: 2 mins

Since the onset of the novel coronavirus (COVID-19) pandemic, the Chinese economy has been severely impacted. Not only has consumer demand for goods and services diminished, namely food and beverages, tourism and retail but there have been major production shutdowns which has ultimately led to a blow to the Chinese domestic markets and global supply chain. As cases and death toll in China grew, the Chinese economy experienced a plunge in industrial output and retail sales in conjunction with a rise in unemployment rate.

China’s industrial production fell 13.5% year-on-year in January-February 2020 on the back of a 6.9% rise in December 2019, hence missing market expectations of +1.5%. The disruptions caused by COVID-19 halted businesses and imposed travel restrictions resulting in the first industrial output drop since 1990. The industries that experienced the greatest plunge in production were transport equipment (-28.2%), general equipment (-28.2%), textiles (-27.2%), machinery (-24.7%) and communication (-13.8%). The evolution of the virus in January prompted large-scale lockdowns causing much of the nation’s economic activity to come to a halt in February which eroded the stabilization of December 2019.

Furthermore, retail sales followed the same trajectory as industrial output with January-February 2020 data showing a 20.5% decline since the same period in 2019, hence missing market expectations of +0.8%. Understandably, this figure comes as no surprise as the growing fears of containing the virus and its infectious nature deterred consumers from going to crowded venues such as shopping malls, restaurants, movie theaters etc. This vast decline comes on the back of retail sales growth of 8% year-on-year in December 2019.

Unemployment is undoubtedly a crucial indicator of the general health of an economy. Chinese data show that during January and February 2020 approximately 5 million people lost their jobs with unemployment rates reaching record levels of 6.2%. This is in contrast to unemployment levels of 5.3% in January and 5.2% in December. Analysts are expecting unemployment figures to increase as the virus worsens even though there is a resumption of work in China for SMEs and larger companies.

However, the pandemic in China is gradually subsiding with reports of no domestic cases of the virus for the first time since the outbreak began. Any new cases of the coronavirus detected were all from overseas arrivals and officials have flirted with the idea of lifting the lockdown in Wuhan once there have been no new cases for 14 days. Although the epicenter has now shifted to Italy and Europe in general, experts are warning about a second wave of infections as observed by other pandemics and as such worsening economic outcomes for China including decrease in GDP and increase in unemployment.

Blog article written by Aditya Kapdi, Research Analyst, Maqro Capital