As the world psychologically comes to grips with the existence of this virus, our sense is that China is going to become a “mask culture.” Everyone on the streets of the main cities today is wearing a mask, and those who are not, get dirty glances. Then you have to make a decision: do I assume the person standing next to me in the elevator is likely to have the virus, or not? Our sense is that people in China are now assuming not—with the caveat that everyone is wearing a mask. So mask manufacturers? A buy for quite a while, we’d say.
Next week is going to see the release of China’s data for the first quarter, showing a massive contraction in the economy. How big, don’t know. Minus 9%, as Nomura Securities is predicting? More? Their bet on Q2 is a further negative 5%. Of course, the whole world is hurting, it’s not just China. But the question is to what extent the special nature of China’s system makes it more or less brittle in face of such an economic body blow. Our view is arguably more brittle, and time will tell.
Next week is also likely to see an announcement by Beijing of a big stimulus package. The last time, during the Global Financial Crisis in 2008-2009, China’s fund splurge had three results—it helped pull the world out of the trough, it created a China debt mountain, and it pumped up the State-Owned Enterprises, because to a very large extent the decision was made to funnel the stimulus funds through the SOEs. This time, the China stimulus package is unlikely to be of huge significance to the world, the debt mountain is already rickety, and the system is fundamentally not set up to assist the private sector. In 2008-9, China’s private sector powered through the problems because the economy throughout was running at more or less 10% y-o-y growth rates, and the world was buying more and more stuff from China’s factories. The China middle class of today is what resulted. But now, it’s a totally different picture.
The virus is most important because it is speeding up trends already in place. That includes exacerbation of rich-poor divides and reconsideration of globalization. The news this week tended to support the decoupling view, and we were particularly struck by announcements by both Japan and the US that they are planning to spend part of their stimulus packages on assisting companies to exit China and come home, thereby reducing supply chain risks and also helping economic activity. This has big implications for the foreign business sector in China’s manufacturing economy, which is still substantial. Foreign investment into China was slowing anyway, but it could fall even more sharply now. Right now, of course, foreign company executives can’t even fly into China, which doesn’t help.
The alternative view is that in the end, business people and consumers choose the best and cheapest product available, regardless of where it is made. So on-shoring these companies may not in the longer term stop China from maintaining its role as the factory of the world. But in the medium-term, it could be a heavy drag on the export side of China’s economy.
The other aspect that springs out right now is a sense of growing negative perceptions about China, in the US and in other places. This is a great time for China to be transparent and cooperative, and indeed for the world to work together to address all of the problems facing us. Being selective on where ventilators can be exported to, for instance, doesn’t help.
The other big development of the week was Bernie Sanders dropping out of the race for Democratic Party nominee, but simultaneously declining to categorically endorse Biden, thereby weakening the anti-Trump push. But our sense is that still, Biden stands a solid chance of winning given the way Trump has handled the virus. This has big China implications, but our sense remains that so much has been revealed in the past three years, that the goalposts have fundamentally moved, and a Biden White House would not fundamentally shift the current course of US-China relations.
Meanwhile, it’s time to put on the mask again, and make another blind guess as to the health of that other person in the elevator. Probably okay?
Have a good weekend.