• GB Davis

China as Proxy - 5/21/20

"China’s economic recovery from the coronavirus pandemic remains uneven, despite initial optimism around the prospects for a sharp rebound following the stabilization in confirmed cases and gradual unwinding of lockdown measures since early March. The latest activity indicators – spanning April and early May – paint a picture of an economy in the midst of a partial recovery: (Fitch, 5/21)

First, we revisit our comments over the past few months on China; and, then we provide insights via Fitch on the present state for what we have been stating since the pandemic started to spread globally, namely: China as Proxy.  AND, we wonder (do you)? when we lambasted Jan Frietag's ridiculous U.S. RevPAR 2020 forecasting (4/4), "first off, Jan Frietag on the tape on Friday (4/3/20) using merely -0.2% GDP decline to base STRs REVPAR forecasting for the Lodging Industry is a joke. Even Jan was hedging indicating a -2.6% bear case - his bear case would be golden sunlight compared to what is already happening under the economic hood." will STR look at what has happened in the recovery (and relative lack thereof) of Chinese Lodging to assist in deriving useful U.S. ADR, Occ% and RevPAR forecasts for the balance of '20 and '21?  We hope so, and we'll standby with popcorn in hand (experts deserve to be held to task, especially if a broad range of "investors" public and private depend on their forecasting in some capacity).

  • On March 22, 2020, in "Week Ahead," we indicated that, " A third of coronavirus cases may be ‘silent carriers’, classified Chinese data suggests."

  • On March 26, 2020, in "Unemployment Claims and Market Currents," we indicated that, " We foresee a circa $US400 billion infrastructure stimulus by China forming sometime between May and August - targeted at infrastructure, public health and 5G roll-out (all high productivity items - and therefore, perhaps, the smartest way to use Gov dollars, temporarily increasing their deficit to an estimated 3.5% from circa 3.0%).  If the U.S. is smart, they will seek to do something similar (Round II of stimulus after the life preserve bill passes next week) - perhaps even tapping all of that private-public infrastructure P/E on the sidelines.  The MAJOR high productivity infra (compared to maintenance capex of existing infra) is high speed rail / MagLev - and this needs to happen - Trump would be wise to make this a platform issue, drawing comparisons to the productivity directly related to such from China - and utilizing economists in the U.S. to support what is, in reality, though not without complexities, low hanging fruit"

  • On April 7, 2020, in "Only Bulls Rush In," we indicated, "there will be a Lasting Impact of this mess too - China, which three weeks ago lifted its internal travel restrictions, is still seeing car demand (auto sales) down by over 40%."

  • On April 24, 2020, in "On Friday's we Pause and Reflect," we indicated,"China as a Bellwether from Lockdown (via Fitch).   Industrial Resumption Stagnates at High Level; Retail Ramps Up High-frequency data on electricity consumption and logistics reveal a fast recovery in China’s industrial activity, although still some distance from 2019 levels. The consumer sector is rapidly returning to normal levels, although the pace of each sub-sector varies. Offline retail and leisure industries are likely to recover at a slower pace, as intra-city traffic data remain subdued. Recovery in Industrial Activity Stagnates: The resumption of industrial activity flattened in April, probably due to lower overseas demand and some supply disruption. The combined daily coal consumption by China’s six key power utilities averaged at 87% of 2019 levels from 1 to 24 April, while internet giant, Baidu, Inc. (A/Stable), estimates that 20% of the working population had not returned to work as of 7 April, based on big-data analysis on its platforms. Steel tyre production rates recovered to around 60% of capacity as of mid-April, up from 40% in early March, versus 72% in the same period last year. The blast furnace operating rate had also recovered to 68% of capacity as of 24 April, up from 64% in early-March, to be on par with April 2019. Large Corporates Recover Faster: Large corporates have recovered faster than SMEs according to logistics data from a leading trucking platform, G7. Full-vehicle trucking volume is already on par with November 2019, a high season for Chinese retail, while less-than-truck-load transport used by smaller corporates has recovered to 90%-95%. This is in line with the Chinese government’s estimate that 99% of large enterprises and 84% of SMEs had resumed operation as of mid-April.

  • On April 26, 2020, in "Week Ahead," we commented, in part, " Where are we Looking for Greenshots? We are monitoring foremost China and what is and is not rebounding there and how fast. -->  https://www.scmp.com/week-asia/opinion/article/3081465/coronavirus-think-worst-over-chinas-economy-not-so-fast  -- U.S. survey data, also shows a lasting psychological impact (and not just for the U3 folk) but in regard to social distancing from COVID on the U.S. Consumer."

  • On April 29, 2020, in "Winners and Losers - Sector Analysis - Where to Start," we indicated, in part, " Apparel is experiencing a similarly worrying slowdown, with consumption 40-50% lower in China compared to pre-pandemic levels."

  • On April 30, 2020, in "Month End Mark-ups will Expire Eventually," we indicated, in part, via Nordea, " [v]oluntary social distancing is also unlikely to stop. So far data out of China also indicate that things will not go back to normal just because lockdowns are ended. Broad activity measures are still 20 to 40% below normal levels."

  • On April 30, 2020, in "Month End Mark-ups will Eventually Expire," we indicated, "New export orders component of CHN PMI: Down to 33.5, indicative of pain outside China. Top Chinese scientists believe the coronavirus could come back each year like the flu  "81% of execs say they’re worried abt a #coronavirus resurgence next 3mos. 69% say April’s tepid pace may be “as good as it gets” into the fall" This has enormous implications. A far cry from what Beijing is spoon feeding analysts right now."  

  • On May 2, 2020, in "Lock, Stock and a Loaded Chamber," we indicated that, "Casinos in Macau, China reopened in March, but gross gaming revenue for the month of April was still down 96.8% from a year ago."

  • On May 20, 2020, in "Checking-in," we indicated, "The Devil is in the Detail.  Figures showing a strong rebound in retail sales in China over the extended Labour Day holiday may not be a good indicator of a recovery in consumer sentiment, Fitch Ratings says.  This is because the sales boom, especially for online sales, could be the result of massive retailer promotions and cash coupons distributed by local governments. In addition, the holiday this year was one day longer than in 2019, which distorted yoy sales growth. Besides, the data from China's Ministry of Commerce (MOFCOM) is from selected companies, which may not be representative of the entire consumer sector. Key companies' car sales, for example, increased sharply in certain cities, according to MOFCOM, while data from the China Passenger Car Association show a 7% yoy decline in national average daily auto sales in the first week of May.  MOFCOM reported average daily retail sales among key retailers during the Labour Day holiday on 1-5 May rose by 31.1% compared with the Qing Ming festival on 4-6 April. Sub-sectors leading the rebound were home appliances, daily necessities, cosmetics and apparels, which saw their daily sales soaring by 71.1%, 53.7%, 38.8% and 31.2%, respectively from the April holiday.  Online sales continued to outperform, rising 36.3% yoy during the holiday versus 5.9% in 1Q20. Alibaba Group Holding Limited's (A+/Stable) Tmall International and JD.com recorded strong gross merchandise volume (GMV) growth of 65% yoy and 45% yoy, respectively. Appliances benefited the most from the holiday online sales boom, with sale volumes of air conditioners and refrigerators surging 99.7% yoy and 49.1% yoy, respectively.  Consumer spending in China still trails the level prior to the coronavirus pandemic, even though consumer appetite for dining and shopping has improved significantly. WeChat payment data from Tencent Holdings Limited (A+/Stable) showed that offline payments rose by 30% month-on-month during the Labour Day holiday, with spending on leisure and catering surging five times and two times, respectively. Despite that, catering and hospitality spending only reached 70% of the 2019 level, according to MOFCOM, and national average shopping mall traffic was still 40% lower than in 2019. Tourism spending is still being held back by concerns about the coronavirus, despite easing domestic travel restrictions. Tourism spending and the number of travellers are less than half of the 2019 levels, with only marginal recovery over the Qing Ming festival. Intra-provincial travel was the preferred choice of holidaymakers, according to Alibaba's data, probably because some companies continued to discourage their employees from traveling across provinces. Fitch does not expect tourism to pick up meaningfully until 4Q20 at the soonest, as people remain hesitant to travel in the short term due to fears about a second wave of infections and the summer vacation peak season is likely to be shortened to make up for school closures earlier in the year.  (Fitch, 5/19)  We expect similar muted responses in the U.S. as lockdowns lift in regard to retail sales, as well as online continuing to pick-up market share (recall, we previously indicated we would be watching the CHN recovery data to draw parallels to consumer and to a less degree, business, behaviors in the U.S."


  • Industrial production, real-estate development, and some investment spending categories have now reverted to mildly positive year-on-year (yoy) growth. At the same time, consumption trends remain anaemic, probably a result of the negative shock the pandemic has had on household incomes and employment.  Mixed data signals, combined with the global economy in severe recession, increase the likelihood that parts of China’s economy follow a logarithmic recovery path, with initial improvements in activity arriving quickly but plateauing below pre-pandemic levels. For the economy as a whole, Fitch expects GDP to remain well below the levels we were forecasting prior to the virus outbreak

  • Fitch Ratings expects GDP growth to be just 0.7% this year.

  • Households and SMEs have borne a considerable share of the economic shock from the pandemic, and appear to be recovering much more slowly. This has important implications for economic policy, given that consumption had become the largest contributor to overall growth over the past decade.

  • Utilities and infrastructure investment, among the more policy-driven FAI categories, have experienced relatively swift recoveries. Utility investment grew by nearly 19% yoy in April, while infrastructure investment growth also reported positive growth of about 4%, up from a 9% yoy contraction in March.

  • Manufacturing investment – among the more market-driven FAI categories – contracted by approximately 6% in April, and appears to be a clear laggard in the economic recovery. Overall, headline FAI rose by an estimated 1% yoy in April, up from -8% in March

  • Another piece of evidence that points to seemingly unwavering demand for housing is residential mortgages, which have risen steadily this year and were up by 21% yoy in April 2020. This is despite average lending rates for housing loans remaining effectively unchanged. Housing prices have also continued to rise. Real-estate development has recovered even more quickly, having reverted to positive yoy growth since March, and accelerating to 7% yoy in April. The recovery of property sales has been more lagged than the investment cycle, and suggests developers are in an inventory-building phase. This is also evident from floor space starts recovering more quickly than sales.

  • More people are clearly out and about in China, with traffic congestion indices showing a meaningful recovery since their depths in late February. As of mid-May, traffic congestion across 100 major Chinese cities has rebounded to about 5%-10% below the average levels recorded over the past three years. This has not translated into a robust recovery in consumption, however. Retail sales fell by 7.5% yoy in April, and are down by 16% year-to-date.

  • One category in particular that underscores the potentially longerlasting impact of social distancing precautions on consumption is catering, which contracted by 28% yoy in April. This is in contrast to a relatively swift recovery in sales of household staple goods, and could in part reflect the negative shock the pandemic has had on household incomes and employment. Fitch has previously estimated underlying urban unemployment could have reached around 18% during the height of the pandemic.

  • In an effort to re-invigorate consumption, local governments have adopted the policy of issuing consumption coupons in some parts of the country. Since late March, the Ministry of Commerce estimates more than CNY19 billion in digital coupons were distributed through China’s major electronic payment platforms. The coupons are provided to local citizens free of charge, and are aimed for use across the most heavily hit sectors such as retail, accommodation, travel, and catering. It remains to be seen how significant the positive spillovers to consumption will be, but local governments have estimated a multiplier effect of about 3-5 times

  • Another subset of consumption that appears unlikely to recover soon is domestic tourism and hospitality. During the recent Labour Day holiday, which ended on 5 May, tourist numbers and revenues were down by 41% and 60%, respectively, based on data compiled by the Ministry of Culture and Tourism. This is despite this year’s holiday season lasting two days longer than in 2019.  One useful reference supporting this view are data suggesting that hotel revenues and occupancy rates are still about 30%-40% of their 2019 levels, despite 90% of hotels having resumed operations as of early May. Average room prices are also down by around 20%.

  • SME Activity Index compiled by Trivium China paints a similar picture, though it estimates that SME activity has since recovered to approximately 87% as of early May. Both surveys depict the image of an SME sector still operating considerably below normal capacity, which has important macro implication – given that SMEs account for 80% of employment and over 60% of GDP, based on official data.

For our (limited amount) of money, we continue to prefer things like $CPS at near 20% of Book/Value (think of this as similar to replacement cost) compared to every single Lodging and Gaming name.

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