May Ling Wee, China equities portfolio manager, provides evidence that a resumption of economic activity is underfoot in China and discusses the accelerating digitisation of the economy, as well as how both companies and the government are supporting consumers and businesses.   

  Key takeaways

  • China now faces a balancing act between the need to ensure the virus is contained and the need for the resumption of economic activity
  • COVID-19 is accelerating and reinforcing China towards the digitisation of its economy and consumer services
  • May Ling expects the impact of the virus on company earnings over the next two quarters to be significant and also a relatively slow normalisation of economic activity in the second quarter
  • She also believes that ultimately the strength of the Chinese consumer can resurface, albeit slowly.

Economic activity is recovering in China, with both the manufacturing and construction sector making a more rapid recovery, while the Chinese consumer appears (for now) relatively more reticent to engage with the community outside of home. The tussle between restoring economic activity versus virus containment persists.

Data is showing a resumption of economic activity

High frequency indicators (periodic snapshots of local economy economic and financial indicators to establish national trends) for the second week of April, suggest that migrant worker movement is still about 30% lower than the same period last year, after the Chinese New Year. Other high frequency indicators, such as coal consumption (down around 10% compared to the same time last year after the Chinese New Year), oil refinery runs (capacity utilisation  ̶  up slightly year-on-year), passenger traffic by road, rail and air (still down year-on-year) and subway traffic (circa 40% of levels at the same time last year) all point to a resumption of  industrial activity, but with people mobility over larger distances still restrained.1

The State Council Press releases have reported that more than 95% of China’s enterprises (above a designated size) and close to 100% of listed companies have resumed work, but work resumption is much lower for small and medium-sized enterprises (circa 60%). Actual capacity utilisation and demand for consumer-facing industries, in particular, are likely to be much lower. A case in point would be restaurants, which have largely reopened since the end of February but where patronage levels are less than half of seating capacity.2 This is a result of the work force not being entirely back to work and also the current preference to dine at home, and for packed lunches to be brought to work. Intra-city subway traffic is recovering, but is still only approximately 44% of levels, (compared to the same time last year) 3 with most choosing private or semi-private transport when venturing out while others prefer the stay at home option.

On the one hand, local governments need to ensure the virus is contained, while on the other hand, they have been tasked to ensure economic activity restarts in their local economies. Shanghai has announced the reopening of its schools from 27 April  ̶   a good sign of the local government’s confidence in terms of virus containment. We think this is a gradual but welcome start to a recovery.

China’s move towards a digital economy is advancing

COVID-19 is accelerating and reinforcing China’s existing trends towards the digitisation of its economy and consumer services. While many physical stores have shut, China’s merchants are turning increasingly to online platforms, such as Tmall and as a means to reach out to the consumer. Keeping the consumer engaged at these times is vital to retain and increase brand presence. As the consumer is largely at home with mobile devices and PCs as the key access points, connecting to the consumer digitally is often the best approach; many companies view digitisation as a necessary strategic investment. The food catering trade is increasingly turning to specialist delivery platforms such as Meituan/ As a result, online food delivery is helping to offset lost sales from physical restaurants. No longer is this dominated by quick service restaurants and fast casual dining operators; increasingly, high end, more expensive restaurants are offering their menu choices online.

As consumers look to protect themselves and their families, as well as connect with friends, relatives and colleagues digitally, they are also looking to entertain themselves while at home. Major game publishers and platforms such as Tencent and NetEase have seen an increase in the number of users and higher monetisation levels on their online game platforms. Elsewhere, more traditional industries, such as life insurance, have seen COVID-19 ramping up the digitisation process, which should lead to further efficiency and productivity gains. As an example, for insurance giant AIA, the sale of a life product in China can now be completed from start to finish without the need for an insurance agent and customer to meet face-to-face, but with the interaction between agent and customer taking place online by video conference. AIA is also increasing the e-recruitment of agents, and is reinforcing the use of technology to drive sales activity and contact with customers.

Online and offline complement each other

While COVID-19 has accelerated the pace of digitisation for many of China’s businesses, it is noteworthy that virtual businesses also require the support of logistics infrastructure to function and meet consumers’ needs. While consumers turned online for the purchase of both goods and services, the delivery was severely challenged in the early stages of COVID-19 due to a lack of delivery staff as many companies rely on migrant workers who had not returned to their place of work, and at the same time there was also restricted access to many residential buildings. In the education space, while COVID-19 saw a rise in online learning offered by after-school tutoring providers and public schools, many students have an intention to return to physical classes when they re-open as they view online learning as supplementary rather than the main option.

Great Wall of China tile

Credit: Getty Images

Tough time ahead for earnings

As of 3 April, approximately 70% of the MSCI China Index’s constituents have released full-year 2019 earnings reports, with earnings largely in line with market expectations.4 The 2019 earnings were based on companies’ performance prior to the coronavirus outbreak. We are just entering the first quarter 2020 earnings season and expect the impact of the virus on company earnings over the next two quarters to be significant. We also anticipate a relatively slow normalisation of economic activity in the second quarter. In our view, cashflows will be challenged for many corporates because revenues in February dropped off or were zero during the lockdown, and also because there will be revenue shortfalls as business activity levels take time to pick up.

Companies are lending support

We expect most large listed companies that have the advantage of scale will be able to emerge from this crisis stronger. State-owned enterprises have been called upon by the government to provide ‘national service’ (similar to other countries) to offer respite to consumers and businesses. This can be in the form of lower energy prices, utility tariffs and rental waivers. Many of China’s large private enterprises are lending support to their supply chains and customers. For example, e-commerce giant Alibaba has announced a reduction in its platform fees for its merchants. Budweiser China, which normally operates on a ‘cash before delivery’ basis, will now offer credit terms, and in some instances provide credit to their established, long-term wholesalers. For small and medium-sized enterprises (the lifeblood of the Chinese economy), instead of profitability, survival and liquidity are of the utmost concern now.

Chinese government is delivering support as expected

We have seen the Chinese government support the economy through both fiscal and monetary policy, although these measures pale in comparison to the magnitude of support recently announced by the major Western economies. China’s banks have been directed to accept the postponement of loan repayments, reduce interest payments or extend loan terms, more special government bonds designated for funding infrastructure investments have been issued, and local governments are easing home purchase restrictions despite the central government insisting that housing is for living and not for speculation. China lowered its 1-year benchmark loan prime rate and reserve requirement ratios have been cut. Local governments are also trying to revive electric and traditional vehicle sales; more than 20 cities have offered sweeteners to stimulate car purchases such as direct subsidies, increasing the quota for licence plates or easing the limit on issuing licence plates. At the national level, the electric vehicle subsidy programme has been extended to 2022.

COVID-19 has also highlighted the need for additional investment into China’s healthcare system. The possibility of a resurgence in coronavirus cases exists as China returns to work and as schools re-open in April. Apart from the two shelter hospitals built in record time in Wuhan during the peak of the crisis, China has announced the building of 50 new hospitals nationally. While it is clear the government will continue supporting the economy in terms of infrastructure and consumption, especially now that China’s exports of goods and services will be affected by the global lockdown, the best remedy is a therapy that can treat COVID-19 and a vaccine that can protect the mass population from being infected.

The strength of the Chinese consumer can return, albeit gradually

In a prolonged challenging economic environment, a focus on high quality franchises that will emerge even stronger after COVID-19 has passed is prudent. Strong balance sheets, healthy cash flow generation and the ability to access financing when required is a clear advantage. For cash rich corporates, asset prices could become more attractive for acquisitions down the road. Likely winners include companies that will benefit from increased government spending on infrastructure. Many companies that rely on domestic consumption have suffered in the market sell-off disproportionately. We believe ultimately the strength of the Chinese consumer can resurface, albeit slowly, after the first quarter’s sharp fall in consumption activities and the second quarter’s (and possibly second half’s) gradual move towards a normalisation of economic activity.



1Source: Bernstein. Migrant worker movement, subway ridership, refining runs, coal consumption as at 15 April 2020.

2 Source: BAML (Bank of America Merrill Lynch) as at April 2020.

3 Source: Bernstein, city subway bureaus as at April 2020.

4 Source: MSCI, Bloomberg, Morgan Stanley Research as at 3 April 2020, index constituents by index weight.



Fiscal policy: government policy relating to setting tax rates and spending levels. Fiscal stimulus refers to an increase in government spending and/or a reduction in taxes to support a weak economy.

Monetary policy: the policies of a central bank, aimed at influencing the level of inflation and growth in an economy. It includes controlling interest rates and the supply of money. Monetary stimulus refers to a central bank increasing the supply of money and lowering borrowing costs.

Liquidity: refers to an asset that can be readily converted into cash; or an asset or security that can be easily traded in the market.

Reserve requirement ratio: a regulatory requirement that determines the minimum amount of cash reserves that a bank must hold.