Driving the Day
1. Economy running at 2/3 normal levels
Economic activity continues to accelerate.
On Friday, Vice Minister of Industry and Information Technology Xin Guobin said most companies are back to work (SCIO):
- “Over 95 percent of major industrial enterprises…outside Hubei Province have resumed operation, and around 60 percent of SMEs have restarted work, according to Xin.”
Get smart: Most companies are not operating at normal levels. Resumption rates should not be equated with rates of activity.
So how does one gauge actual economic activity?
Trivium has you covered. We’ve done some number crunching and come up with our own estimates for business activity.
Here are the latest numbers:
- As of March 16, the Trivium National Business Activity Index indicates that China’s economy is operating at 69.5% of typical output. That’s up from 66.3% on March 13.
- As of March 16, the Trivium National Large Enterprise Activity Index indicates that China’s large enterprises are operating at 74.6% of typical output. That’s up from 74.2% on March 13.
- As of March 16, the Trivium National SME Activity Index indicates that China’s economy is operating at 66.0% of typical output. That’s up from 61.0% on March 13.
Get smarter: Supply-side constraints to business activity have largely been addressed. The key concern for companies now is weak demand.
China to fast-track work resumption across industrial chain
Trivium National Business Activity Index
2.Data dump – industry, consumption, and investment
Econ data for January and February dropped Monday morning.
The numbers are terrible.
Why that’s a good thing: It means the government is being honest about what is happening.
- Industrial production was down 13.5% y/y in Jan-Feb from 6.9% growth in Dec – this is the largest two-month drop on record.
- Retail sales are down 20.5% y/y in Jan-Feb from 8% growth in Dec – also the largest drop on record.
- Fixed asset investment fell 24.5% y/y in Jan-Feb from 5.4% growth in Dec (ytd) – also the largest drop on record.
The bottom line: The economy is in the dumps.
What to watch 1: Based on this data, Chinese GDP growth in Q1 is likely to be0% or negative on a y/y basis – and deeply negative on a q/q basis.
What to watch 2: China won’t hit 5.5% GDP growth in 2020.
Our question: How will authorities message the fact that they won’t hit their target of doubling per capita GDP growth between 2010 and 2020?
Get smart: It’s still better to miss the target than to stimulate.
3. PBoC throws the banks a bone – RRR edition
On Friday the central bank (PBoC) announced a targeted cut to banks’ reserve requirement ratios (RRR) – implemented today.
Any guess on the key word here?
- If you said “targeted”, five points to you.
- RRRs will be cut by 50 to 100 basis points for banks that hit “inclusive finance targets.”
- Joint-stock banks can get another 100-basis-point cut for hitting such targets.
- The total liquidity injection is expected to be RMB 550 billion.
Some context: According to the PBoC inclusive finance includes:
- Production loans for farmers
- Consumption loans for poverty-stricken people
- Student loans
- Business loans for small and micro entrepreneurs of less than RMB 10 million
More context: Joint-stock banks are medium-sized banks. They are being given the added incentive after it was already offered to smaller banks last year.
Get smart: The PBoC has been leaning heavily on banks to provide forbearance to companies struggling from the COVID-19 outbreak. That is hurting bank balance sheets.
Get smarter: This move is less about juicing the economy than it is providing some relief to banks that have been playing ball – the PBoC estimates it will reduce banks’ interest payments on reserves by about RMB 8.5 billion per year.
The bottom line: Authorities continue to be highly targeted in their policy support.
4.Bank of Jinzhou bailout marches on
The hits just keep on coming for troubled lender Bank of Jinzhou (see September 4 Tip Sheet).
Fortunately for the bank, so does the state largesse.
Caixin has the details:
- “Two government-owned entities [have agreed] to inject nearly RMB 12.1 billion…[into the] company through private placements that will make them the lender’s biggest shareholders.”
How it will work:
- “Bank of Jinzhou is planning to sell new equity amounting to 44.3% of its enlarged share capital to Beijing Chengfang Huida Enterprise Management Co. Ltd., a special-purpose vehicle ultimately controlled by the People’s Bank of China (PBOC), and Liaoning Financial Holding Group Co. Ltd., a company set up by the finance department of the government of Liaoning.”
- “The proceeds of the placements…will be used to replenish the bank’s core Tier-1 capital, the highest-quality capital a bank has to absorb losses.”
Get smart: For most folks, the banking sector’s challenges are not top of mind, because everyone is concerned about getting the economy back on track.
Get smarter: But the PBoC isn’t asleep at the wheel – because it can’t afford to be. Measures like this and the recent RRR cut (see previous entry) will become increasingly necessary as the COVID-19 fallout continues.
Caixin: PBOC to Become Bank of Jinzhou Biggest Shareholder in Latest Bailout
5.Property developers continue to struggle
As China’s economynormalizes, a few industries continue to lag behind.
Perhaps the most concerning laggard is the all-important property sector – which has seen bankruptcies shoot up over the past few weeks in the face of the virus outbreak (Caixin):
- “In the first two months of this year, around 105 real estate firms issued bankruptcy filing statements, after almost 500 collapses in 2019.”
The outlook isn’t pretty:
- “According to SP, new home sales in China will register their first drop in 12 years this year, with transactions down as much as 15%.”
- “That’s if the virus reaches a turning point this month. If the nadir isn’t until April, sales could be down around 20%.”
- “Fusheng Group Co. is one of the first mid-sized developers to falter.”
- “The debt-laden company, based in China’s eastern Fujian province, was in talks to sell a 70% stake to a consortium led by Shimao Property Holdings Ltd., people familiar with the matter said in December.”
Get smart: As we’ve said repeatedly, policymakers are not set to bail out the real estate industry, or utilize it to juice the economy.
Get smarter: Property developers were already in dire straits.COVID-19 will accelerate industry consolidation.
Caixin: Over 100 Builders Go Bust in China as Virus Strains Deepen
6.Xi reaches out to world leaders
On Saturday, Xi Jinping made calls to the leaders of countries and regions facing particularly acute COVID-19 crises.
- South Korean President Moon Jae-In
- Iranian President Hassan Rouhani
- Italian President Sergio Mattarella
- President of the European Commission Ursula von der Leyen
His message: We gotchu, fam.
The messages to all four leaders were broadly similar, stressing cooperation and mutual support in the face of the COVID-19 pandemic.
Moreover, Xi pledged to actively provide assistance to combat the virus’s spread.
Some context: As new COVID-19 cases slow to a trickle in China, Beijing has begun dispatching medical teams and material to other countries.
China’s donations have won it international plaudits.
- In Italy, for instance, we’ve got friends and family who have told us that Chinese assistance has kicked off a wave of pro-China sentiment among Italians.
- Beijing’s aid was doubtless particularly welcome after the European Union refused Rome’s request for additional medical supplies earlier this month.
Get smart: Having come through the worst of the coronavirus crisis, China is now looking to share its experience with the rest of the world.
Get smarter: This could be a major boon to Chinese soft power.
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Reuters: China sends medical supplies, experts to help Italy battle coronavirus
7.Li looks to stabilize foreign investment
Like the rest of the economy (see entry #2 above), foreign investment also got whacked in the first two months of 2020.
Last Friday, the Ministry of Commerce (MofCom) released a pretty poor batch of foreign investment data:
- Actually utilized FDI clocked in at RMB 134 billion, representing a 8.6% y/y drop.
- Even worse, February FDI dropped by 25.6%.
These numbers had top leaders spooked.
On Friday, Premier Li Keqiang pressed for more reforms to restore normal levels of foreign investment (Gov.cn 2)
- “We can’t stabilize foreign trade and foreign investment without more forceful reform and opening up.”
Specifically, Li wants:
- All supporting policies to treat domestic and foreign companies equally
- To open up more sectors to foreign investment, particularly in the service sector
- To build an international and rules-based business environment
- To speed up the negotiation of bilateral and multilateral free trade agreements
Li asked everyone to see the big picture:
- “All regions and departments should take the interests of the country and people as the top priority…, go beyond local interests, and push for more reform and opening up.”
Get smart: At various time in the PRC’s history, challenging circumstances have ushered in thoroughgoing reforms to the system.
Our question: Could this be one of those times?
21st Century Biz: 2月中国利用外资下降25.6%，商务部称投资者观望情绪加重
Gov.cn: Premier stresses advancing normal operation of market