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

Disclaimer

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.

How Stay-at-Home Economy Beats the Market in China?


The coronavirus outbreak in the middle of January has put the world’s second-largest economy in a stand-still for almost three weeks. During which time, productions are delayed, transports links are disrupted, shops and restaurants are forced to close, and the stock market slumped over 8% in one day, the biggest daily drop since March 1997. However, there is one kind of economy that breaks through the gloom and hopefully become the new growth driver in spite of nationwide anxiety over economic slowdown. This is what we call “stay-at-home economy” or “homebody economy”.

What is Stay-at-Home Economy?

Activities that used to require transportation or at least conducted outside the residence are now moving to your own house as the self-quarantine policy is strongly advocated by the Chinese authorities. Stay at home economy triggered businesses such as e-tailing, food delivery, online education, collaborative office software, and gaming. However, whether the growing trend of these segments would last in the longer-term remains a question.

The Business that Benefits from the Growing Stay-at-Home Trend

China’s e-commerce giants, which earlier developed their fresh food arms, had a good harvest recently. JD Fresh, the fresh food arm of JD, saw orders rising 215% YoY[1] from the Lunar New Year Eve on January 24th to February 2nd. However, great opportunities always came along with big challenges. Hema, the offline retail store of Alibaba, which also offers home-delivery service, faced a strong labor shortage due to skyrocketing orders in the past weeks. In the city of Wuhan – the epicenter of the crisis, people stayed until midnight just for a new batch of vegetables hitting shelves. Due to the labor shortage, the delivery quotas usually go in less than one minute. It seems that the whole city shrouded by the deadly virus is relying on fresh food deliverymen to feed people’s stomachs. Hema was reported to hire employees at chain restaurants in Beijing, which had their business shut down because of the coronavirus, to help with packing and operating. But it was still not enough.

Another food-related business that saw rapid expansion during the coronavirus outbreak is food delivery. Hong Kong’s major food delivery operators are enjoying a big boost in demand as a growing number of people tend to eat-at-home to avoid the risk of human-to-human transmission in crowded restaurants. One of the commonly-used food delivery platforms in the city recorded a 60% increase in order volume, month-on-month, in January[2]. While in early February, the pace of growth dramatically accelerated when the reported cases climbed in China.

Apart from the food issue, the massive stay-at-home population also benefits some other industries and gaming is probably one of the top winners. One of Tencent’s most popular mobile games hit a new record-high in daily average users during the week of January 30th. The game with around 60 million to 70 million daily active users saw its number of users surged to over 100 million over the Lunar New Year holiday[3].

As schools delay opening in the spring semester, some 276 million Chinese students are trapped at home and forced to become online-learners. Offline after-school operators were dealt a strong blow while their online counterparts’ enrollments grew dramatically even when spending less on promotions and advertisements.

Will Stay-at-Home Economy Continue to Grow After the Epidemic is Over?

As the newly reported cases number of coronavirus epidemic shows a downward trend and people gradually get out of their homes, the beneficiaries of the stay-at-home boom need to reinforce the strong momentums of their businesses.

If we look at the online education sector, the virus outbreak largely changed the K12 after school tutoring market landscape in a short period. However, although online schools were flooded with new enrollment, there are already reports saying parents are worried that too much screen time would cause a surge in childhood myopia. Others say the education quality in online schools is not as good as that of regular offline ones. Thus, the future growth of this business model is still constrained even if online education becomes more acceptable for parents after this ‘involuntary trial period’.

Office collaboration software, such as video conference apps, ranked at the top in terms of downloads during the first half of February as millions of people started home office. This might be an opportunity for China’s SaaS (Software as a Service) industry, which is relatively small compared with North America and Europe. Although those apps are downloaded for free at present, as more and more people get used to them, they could be profitable in the future.

It is widely believed that one can make or break most habits when consistently practicing a routine for 21 days. If the same rule applies to industries, the stay-at-home economy stands at the boundary of fun experiments and long-term shifts. It is unknown whether the alteration would remain after the epidemic season. However, a journey of a thousand miles begins with a single step. For those video conference apps or e-tailers, this is a mighty kick of their adventures.


[1] Source: JD.com Corporate Blog, as of Feb 2020

[2] Source: South China Morning Post, as of Feb 2020

[3] Source: South China Morning Post, as of Feb 2020

Disclaimer

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.