What did China do right? How did they bend the curve, and is economic activity really returning?

LAGOS (Capital Markets in Africa) – Chinese authorities acted late to contain COVID-19 because of local governments’ initial confusion and obfuscation of the mysterious illness, and they then had to resort to extreme social-distancing controls and lockdown measures. The new infections curve in China was also flattened through large-scale virus testing, which led to more accurate diagnosis and ultimately slowed the contagion. Singapore, Hong Kong, and Taiwan quickly learned from this example and were able to act early — using testing and targeted tracking and isolation as their effective public health measures, which have been much less disruptive.

Mass shutdowns were previously viewed as draconian, stop-gap containment measures, but are now being used by governments all over the world who have responded late to COVID-19’s arrival. Despite being disruptive, these measures have achieved effective results: For example, two months after the government locked down Wuhan on Jan. 23, the Ministry of Health has reported no new infection cases. What bears watching is that even though China has flattened the curve, so far the world has not.

That being said, China is still not out of the coronavirus woods yet. The country has shifted its attention from preventing the domestic spread of the disease to preventing foreigners from bringing the contagion back into China. There still remains around 9,000 cases of serious infection as well as 5,000 to 6,000 suspected infections, as opposed to only a few hundred cases of suspected infections that the government had originally expected.

These extreme health control measures have been effective for China, but come at a steep cost. Beijing sacrificed near-term economic growth3, recently reporting its worst monthly economic data on record4, which will likely translate into flat or negative gross domestic product (GDP) growth in Q1.  On the bright side, economic activity is rebounding, led by production activities:

• As of last week, the work return rate reached above 95% for large industrial companies and around 60% for small and mid-sized enterprises, and production capacity is starting to normalize slowly.
• Highway traffic, including freight transport, is up 9.8% year-over-year and has returned to normal.
• Coal consumption by power plants was 78.7% of the level for the same period of last Chinese New Year. This is higher than 74.7% of the level, which is what was seen the previous week, but is still below the 95% that would normally have been reached.

On the other hand, demand-driven economic activity continues to remain soft:

• Weekly land transactions in the top 10 cities dipped slightly from last week.
• Total passenger traffic was still weak, down 63% year-over-year, with railway down 71.3% and air travel down 73.7% for the same period.
• School reopening in Qinghai province started in a cautious way this past week and will likely be followed by other provinces with low health risks.

The Chinese economy is seeing healthy increases in credit demand, with loan growth up 12.1% year-over-year in February. Money supply growth hit a two-year high last month, up 8.8%. These developments are encouraging and — when coupled with recent monetary stimulus from the People’s Bank of China and a widely expected significant fiscal stimulus — point to the potential for China’s economy to experience a V-shaped recovery.

Source: Invesco Global Market Strategist