InvestNow News – 15th May – Russell Investments – What’s next for China after COVID-19?
12 May 2020 – Alexander Cousley
Our outlook for the Chinese economy remains modestly constructive, with the path back to normalcy continuing, and more stimulus in the pipeline. In the shorter term, weak external demand (the global economy is either in final stages of lockdown, or very early stages of restarting) will be a drag on the manufacturing sector. Risks around the slowing of globalization and tensions with the United States have risen and are discussed in more detail below.
China’s economy: A return to normal?
The Chinese economy continues to normalize, led by the manufacturing sector. The services side of the economy, such as retail and hospitality, has been a bit slower in the recovery as the consumer has been more cautious to both spend time in public spaces and also to spend on discretionary goods. This dynamic is also being seen in South Korea, where people are hesitant to visit shopping malls and other public areas.
The manufacturing sector’s normalisation over the next few months is going to continue to face the headwind of soft global demand, given the lack of activity in the rest of the world. This will disproportionally weigh on private companies, which tend to be more export oriented.
As we noted in a recent blog post, signs of improvement in the economic outlook will show up first in the forward-looking components of the purchasing manager indices, the credit flow data and the trade data. While we have seen some early improvements in the first two, we suspect that a substantial part of the credit uptick has been in the form of bridge loans and other support measures, rather than reflecting a boost in confidence and investment.