Two Reasons China Outperformed the Global Market in COVID-19 Recession

When a pneumonia of unknown cause was first detected in central China’s city of Wuhan in November 2019, no one expected that this virus, later named COVID-19, would become a global pandemic that infected as much as four million people and caused over 300,000 deaths in half a year[1]. The deadly coronavirus not only posed a big threat to the world public health system, but also grinded entire economies to a virtual standstill. To prevent the spread of human-to-human infections, world leaders locked down counties and cities, closed the factories and restaurants, and issued travel bans and social distancing policies, which in turn, brought the global economy to a recession.

As the initial epicenter of COVID-19, China paid a heavy price for the strict containment measures, suggested by the GDP readings of -6.8% YoY contractions in Q1, a historical low since the figure started publishing in 1992[2]. Fortunately, with the initial success in containing the virus, China is now getting back on its feet while much of the rest of the world is struggling with soaring death tolls and floundering economies.

We see signs indicating that China is the first major economy to emerge from the disruption. Though challenges remain as the strong interconnection between China and the shrinking world economy makes it impossible to stand alone, we believe two drivers, namely China’s lead in virus containment and substantial, targeted, but more measured supportive policies, are propping up an umbrella for China under the global economic downpour, while the US economy probably would not fully recover until Q4, 2021[3].

First In, First Out

Compared with the financial crisis in 2008, which started as a subprime mortgage crisis and eventually erupted into an all-out financial crisis, the coronavirus shock is more severe as the containment measures directly hit the real economy, including the global supply chain, oil consumption, company earnings, education systems, and people’s everyday life. Thus, the magnitude of the recession is not decided by the financial system but largely linked to the evolution of the virus and how long the containment measures need to be kept in place.

China has earned itself a high mark in the anti-coronavirus recession battle initially through virus containment. To curb the spread of the disease, China instituted unprecedented nationwide restrictions in late January and has only been eased in early March after President Xi Jinping visited Wuhan. 

For many other countries, in terms of containment policies, instead of employing China’s strict lockdown measures, softer social distancing measures were put in place. Admittedly, China’s strict measures pushed the economy to a halt in February, which is more punitive to near-term growth. However, it made China ahead of the world in getting out of the woods.

Substantial, Targeted, but Measured Policies                      

The frozen economy under the coronavirus prompted ever-increasing monetary policies and fiscal supports in major economies. The US took a lead to announce an interest rate cut, followed by unlimited, open-ended quantitative easing (QE), including the purchase of corporate and municipal bonds and a stimulus package with a $2.3 trillion price tag mainly to support the economy[4]

Although the generous supportive measures seem to bring some hopes of preventing an economic catastrophe, the trillions of dollars rescue package would push up budget deficits which is expected to widen to a historically high level. The rescue package approved by the US government so far is likely to increase the country’s fiscal deficit to 18% of GDP, the largest level since 1940s and could widen further to 24% of GDP if there is an additional $1.25 trillion stimulus[5]. While spending increase and tax cuts would further lead to a weaker government balance sheet, which becomes a heavy burden to serve its own population in the coming future.

China, on the other hand, is much more measured in launching supportive policies. Different from the intensive policies launched by the US policymakers shortly after the virus outbreak in March, China phased its policies into different stages, focusing on the specific major issues in each stage.

In the past few years, China issued special-purpose bonds dedicated to infrastructure spending. The quota for special purpose bonds was further expanded in March as part of a set of policies. Fiscal policies continue to be proactive to channel more affordable credit to the country’s 30 million small and medium-sized businesses (SMEs), which account for 60% of gross domestic product and half of tax revenue[6]. To help them withstand the financial hardships, the People’s Bank of China (PBOC) trimmed the reserve ratio for rural and small city commercial banks by one percentage point at the beginning of April, which freed up $56 billion of liquidity to SMEs[7].

In April, as the global spread of the virus negatively affected demand for Chinese exports, more stimulus, such as government-issued consumption vouchers, which can be redeemed at participating dinning, shopping, travel and recreational enterprises, is issued to trigger the domestic demand. There are signs of increased consumer confidence instilled by the massive issuance of government vouchers, suggested by the daily sales of major retailers rebound during Labor Day holidays, which witnessed a meaningful increase of 32% from Ching Ming Festival (A holiday in early April)[8].

Policymakers in China are more mindful to avoid deploying massive indiscriminate policies because of the negative consequences the world’s second-largest economy endured from the last round of stimulus during the 2008 Financial Crisis. With more targeted and disciplined policy supports this time around, we do not expect a rising tide lifts all boat phenomena in the Chinese equity markets. Given this case, investing in China requires careful and in-depth stock picking, as not everything in the market would bear a good return. For stock pickers like us, this would be a good backdrop to perform. We have concentrated our holdings in competitive and innovative companies led by experienced management teams, and so far this year, most have proven to possess a strong ability to weather the volatilities under economic uncertainties.

[1] Source: Johns Hopkins Coronavirus Research Center, as of May 2020

[2] Source: Business Insider, as of April 2020; China’s National Bureau of Statistics

[3] Source: Morgan Stanley Research, as of April 2020; Haver Analytics, NBS, Morgan Stanley Research estimates

[4] Source: CNBC, as of April 2020

[5] Source: Morgan Stanley Research, as of April 2020; BEA, Federal Reserve, Historical Statistics of the United States, Morgan Stanley Research estimates

[6] Source: South China Morning Post, as of May 2020

[7] Source: Bloomberg, as of April 2020

[8] Source: Credit Suisse, as of May 2020; Ministry of Commerce


This document is based on management forecasts and reflects prevailing conditions and our views as of this date, all of which are accordingly subject to change. In preparing this document, we have relied upon and assumed without independent verification, the accuracy and completeness of all information available from public sources. All opinions or estimates contained in this document are entirely Zeal Asset Management Limited’s judgment as of the date of this document and are subject to change without notice.

Investments involve risks. Past performance is not indicative of future performance. You may lose part or all of your investment. You should not make an investment decision solely based on this information. Each Fund may have different underlying investments and be exposed to a number of different risk, prior to investing, please read the offering documents of the respective funds for details, including risk factors. If you have any queries, please contact your financial advisor and seek professional advice. This material is issued by Zeal Asset Management Limited and has not been reviewed by the Securities and Futures Commission in Hong Kong.

There can be no assurance that any estimates of future performance of any industry, security or security class discussed in this presentation can be achieved. The portfolio may or may not have current investments in the industry, security or security class discussed. Any reference or inference to a specific industry or company listed herein does not constitute a recommendation to buy, sell, or hold securities of such industry or company. Please be advised that any estimates of future performance of any industry, security or security class discussed are subject to change at any time and are current as of the date of this presentation only. Targets are objectives only and should not be construed as providing any assurance or guarantee as to the results that may be realized in the future from investments in any industry, asset or asset class described herein.