Driving the Day
1. It’s a long way to recovery, it’s a long way to go
Yesterday, mainland China reported eight new COVID-19 cases.
Of these, five are from Hubei, all in the capital city of Wuhan. This is the second day that the epicenter of the outbreak kept new cases in the single digits.
Of the other three cases reported elsewhere in the country, all three were imported from abroad.
That’s great news, but Chen Yixin, one of the centralgovernment’s point men in Hubei, made it clear there would be no rest for the weary.
In a meeting with local businesspeople yesterday, Chen said he wants them to move on to another fight (Hubei.gov):
- “[We need to] plan early to win the ‘second battle’ to develop Wuhan’s economy.”
The Hubei government heeded the call. Yesterday, it released 30 measures designed to restart the economy, including:
- More cuts to taxes, social contributions, utility fees, transport costs, and business rentals
- More cheap financing for local businesses
But actual work resumption won’t be easy. Take the auto industry, one of the pillars of Wuhan’s economy, as an example:
- Dongfeng Motors, one of China’s biggest state-owned automakers, is still operating at severely reduced levels.
Unsurprisingly, staff shortages remain a major challenge:
- Only around one-third of staff has gotten back to the production line.
Get smart: Expect Hubei’s resumption timeline to lag about a month behind the rest of the country.
2.Economy operating at two-thirds normal levels
As COVID-19 cases drop off in China, authorities continue to focus on getting the economy up and running. The key challenge for businesses strategists, though, is getting good data on where exactly the economy is – right now.
- Enter the Trivium China business activity indices.
Some context: Over the past few weeks, all of China’s provinces have reported local resumption rates for large companies. We’ve aggregated that data, weighted it by provincial GDP, and adjusted for estimated capacity utilization.
More context: We’ve done a similar exercise for SMEs, based on national-level reporting. By looking at the two indices combined, we can get a read on overall capacity utilization.
As of March 13, we estimate that:
- China’s economy is operating at 66.3% of typical output.
- Large companies are operating at 74.2% of their typical output.
- SMEs are operating at 61% of their typical output.
The key takeaways:
- The vast majority of Chinese businesses have at least turned the lights back on.
- Achieving full capacity utilization is still hampered by workforce shortages.
Get smart: Critically, getting from 66.3% to close to 100% relies not just on addressing supply-side constraints, but also on a swift resumption of consumer demand.
What to watch: Starting Monday, we’ll release our updated indices daily.
3. Pandemic whacks the CNY
Unless you’ve been living under a rock, you know that global markets have tanked this week, as the WHO officially labeled the COVID-19 outbreak a global pandemic.
One aspect of the financial fallout is a spiking US dollar as investors shun risk assets for safe havens and companies draw on dollar credit lines.
That’s led emerging market currencies to tank – including the CNY, putting pressure on already-strapped Chinese companies (SCMP):
- “Signs of stress may already be surfacing among China’s most indebted companies, with the volume of Chinese US dollar-denominated bonds issued falling sharply in February, hampering their ability to raise funds even as China’s central bank eases domestic lending conditions.”
Enter the State Administration of Foreign Exchange (SAFE), allowing Chinese companies to borrow from overseas more easily:
- SAFE raised something called the macroprudential adjustment parameter from 1 to 1.25.
- Trust us on this one, it means companies can employ their balance sheets to borrow more money offshore.
Get smart: This should help reduce currency risk for externally leveraged Chinese companies, and is in line with the broader easing of financial burdens in the face of COVID-19.
Get smarter: It looks like the central bank is intervening to manage the pace of depreciation in the CNY – but more weakness is yet to come.
SCMP: Coronavirus: how epidemic could hurt China’s US dollar debt payments
The Paper: 境外融资松动：外汇局上调全口径跨境融资宏观审慎调节参数
4.Revenge spending key to economic recovery
For China’s economy to fully normalize, not only do workers need to get back to the office and factory floor – but consumers need to get out those wallets.
That means the pace of economic recovery hinges largely on “revenge spending” (Bloomberg):
- “Store traffic in China is creeping back up after falling as much as 80% at the virus outbreak’s peak.”
- “The recovery could accelerate in the coming weeks, fueled by so-called ‘revenge spending’sprees.”
And things are looking up. The following comment echoes the sentiment that we hear on the ground:
- “Andy Li, who works in financial technology, agrees. ‘I was trapped in my home for an entire month,’ Li said. ‘Our residential compound was chained up, and we were not allowed to go anywhere. Now I feel somewhat free again.’”
The government is getting ready to cash in on that spending fever. This morning, 23 ministries released a joint plan to facilitate consumption (Gov.cn).
Get smart: Everyone has been obsessed with the supply side of China’s economy over the past month.
Get smarter: Going forward, the demand side will be even more important – businesses won’t ramp up to full capacity if they don’t have anyone to sell their goods to.
Bloomberg:‘Revenge Spending’ Spurs Chinese Luxury Rebound From Virus
5.Xi promises to help the world fight COVID-19
On Thursday, Xi Jinping spoke with UN Secretary-General Antonio Guterres by phone.
Xi’s message: China is prepared to help the world tackle COVID-19 (China Daily).
- “Noting that with COVID-19 having recently occurred and spread in a number of countries, the situation is worrying, he urged the international community to take urgent action and carry out effective international cooperation in joint prevention and control, so as to form a strong concerted force to combat the disease.”
- “China stands ready to share its experience with other countries, carry out joint research and development on drugs and vaccines, and offer as much assistance as it can to countries where the disease is spreading, Xi said.”
Xi is putting his money where his mouth is (Straits Times):
- China has already sent expert teams and supplies to Iran, Iraq, Italy, and Spain.
Get smart: As the virus spreads globally, China’s efforts to contain the virus look increasingly impressive.
Get smarter: By positioning China at the forefront of global virus control efforts, Xi is attempting to bolster the Party’s legitimacy at home, as well as its standing abroad.
CPC People: 习近平同联合国秘书长古特雷斯通电话
China Daily: Xi says nation will overcome virus outbreak
Straits Times: Coronavirus: China sends expert team, medical supplies to Italy and Spain
6.Business resumption inspections launched
On Thursday, the general offices of the Communist Party Central Committeeand the State Council jointly released a notice to start a national survey of business resumption.
The survey will see central government officials on the ground nationwide, with 29 inspection teams to fan out across the country by mid-March.
The survey serves multiple purposes:
- Supervising local governments in implementing relief policies
- Helping to address business challenges on-site where possible
- Gathering information from local governments and businesses to guide further policy responses
- Coordinating policies across regions and ministries
The central government will be looking to address all the main challenges businesses are facing in getting back to work, including:
- Transportation and logistical choke points
- Capital shortfalls
- Lack of raw materials
- Supply chain breakdowns
- Labor shortages
Get smart: Some resumption bottlenecks cannot be cleared by individual local governments. Rather, they require cross-regional and cross-agency coordination.
Get smarter: In case this wasn’t clear enough already, thiseffort signals an all-out effort to revitalize economic activity.
7.State Council delegates land approval power
Yesterday, the State Council issued a decision to delegate to provincial governments some land approval power.
The deets (China.org):
- “Except for permanent basic farmland, governments of all provinces, autonomous regions and municipalities shall be given the right to approve the conversion of agricultural land into construction land.”
Some context: The decision follows a revision of the Land Management Law approved in the fall of last year (see August 27, 2019 Tip Sheet).
But there’s something new as well – some provinces get significantly expanded power:
- “A pilot program will be launched to entrust some provincial-level governments with the right to approve the conversion of permanent basic farmland into construction land.”
The lucky eight:
Why that matters: Construction land is a key factor for investment.
Get smart: This will NOT give provincial governments the power to increase the total scale of land used for construction (that power still lies with the central authorities). Butit will make it easier for provincial governments to allocate landwith a view to attracting investment.
China.org: China’s provincial-level governments enjoy more autonomy over land use