Weak Chinese consumption may outlast the coronavirus. A slowdown in new Covid-19 cases outside Hubei province, where the outbreak is thought to have originated, is feeding investor optimism. Signs of stress, though, hint at a slower recovery.
Official figures put new confirmed cases across mainland China at 648 on February 22, up from 397 a day earlier, bringing the country’s total to nearly 77,000. That reverses a few days of decline. And despite worrisome spreads in other countries, new infections and deaths outside Hubei have been falling.
These numbers, along with lending-rate cuts, have fuelled a stock market rally. After tumbling 10 per cent from the start of the year through early February, China’s CSI300 has bounced back to December levels. Hong Kong’s Hang Seng benchmark index also has recaptured earlier losses.
The optimism mirrors the SARS epidemic. The number of new cases peaked in China in February 2003 and in Hong Kong two months later. Between January and April, the MSCI Asia ex-Japan index fell 10 per cent, and was followed by a 50 per cent surge over the next seven months. Likewise, China’s real GDP growth slowed to 9.1 per cent in the second quarter; by the third and fourth quarters, the pace reached 10 per cent again.
There are widespread expectations for something of a repeat. In one emblematic example, Standard Chartered analysts forecast Chinese growth to dip to 2.8 per cent in the three months to March before bouncing back to 6.5 per cent in the second quarter. This V-shaped recovery largely assumes the virus will burn out by March or April.
Scepticism is warranted, though. Some scientists attribute the reduction in new cases to revised counting methods. And this weekend’s spike in infections across South Korea, Italy and elsewhere raise fresh questions about containment efforts, despite travel bans and quarantines.
Moreover, China’s post-SARS rebound was led by its industrial sector, which accounted for 60 per cent of GDP growth, according to Fitch Ratings. Today, consumers matter more. Nine sectors responsible for 42 per cent of economic activity, including real estate, will be hit most by falling domestic demand, StanChart reckons. High debt levels also reduce the effectiveness of monetary stimulus and weak demand from abroad could hammer exporters, which are big employers. Frozen salaries and mass layoffs present a rising risk.
Car sales in China cratered 92 per cent in February from a year earlier, while major property developers like Evergrande are offering steep discounts. The prospects for a quick and sustained recovery are looking shakier, or at least more distant. It will take far more this time around to nurse China’s consumers back to health.