Strategy & economics
Bounceback: the China experience
Strategy & economics
Bounceback: the China experience
As the West grapples with increasing mobility restrictions to contain the virus’s outbreak, China has been through the worst and is gradually recovering – both physically and economically.
As of mid-March the number of new cases were in decline, and most of those emerging related to “imported” cases – from people newly arrived within China’s borders.
The primary reasons behind China’s successful containment of the outbreak were the draconian quarantine measures and rapid testing. These may prove more difficult to replicate in the West due to cultural differences – and limitation of resources.
For instance, China swiftly implemented a requirement to undertake rapid testing of any suspect case; immediate isolation of anyone who was a confirmed or suspected case – and then the quarantine of the patient and close contacts for 14 days.
By contrast, the UK government has said that it would only test for COVID-19 among people admitted to hospital; and that people with mild symptoms wouldn’t be tested but should stay at home.
This is a particular problem with COVID-19 because up to 80% of those infected may have only mild or moderate symptoms. Mobility restrictions in the UK and elsewhere – as opposed to China's response – have been more focused on self-observation rather than a strict, enforced lockdown.
The economic consequences of China's form of control are devastating but temporary. And history may yet show they are the correct and necessary response.
Following China’s decision to put most regions, especially Hubei province, on lockdown, the country’s January-February economic indicators slowed significantly and broadly on the COVID-19 outbreak. Industrial production, retail sales and fixed investment contracted 13.5%, 20.5%, and 24.5% respectively year-on-year. However, as the virus’s spread became more clearly contained, we have seen evidence of normalisation.
March activity – based on data at the middle of the month – has seen broad improvements across many indicators. These include, for example, pick-ups in vehicular traffic.
Automobile traffic index
Car traffic: congestion level measures % increase in travel time compared with free-flow conditions
From the Chinese authorities we know that by March 17, the work resumption rate for small and medium enterprises had reached 60% and even 90% for some provinces outside of Hubei (the epicentre of the outbreak).
Passenger numbers are recovering fast
China’s use of stimulus
The Chinese stimulus measures are likely to prove more effective in putting the economy back on track than equivalents deployed in Western economies. This is because in addition to grand-scale monetary and fiscal measures, local government in China can provide highly targeted support. This can vary according to the urgency of local need. For instance, amongst the many measures announced, Hubei Province has set up a special fund amounting to 200 billion yuan ($28 billion) to alleviate funding pressure. It also adjusted the minimum capital ratio of infrastructure projects from 20% to 15% to improve investments in highways, railways and other projects.
Elsewhere Shanghai rolled out a subsidy plan for companies that were heavily impacted by COVID-19, while Heilongjiang province set up an “SME stability fund”.
Another differentiating factor between China and the West is that China has a large state – or quasi-state-owned sector, where employment is comparatively secure. In the face of a sudden halt in activity this limited potential job losses.
A culture of community
The Chinese people have a strong awareness of community. They are also culturally inclined to obey authorities, something which appears to have played a large role in the early containment of the contagion. With a population of 1.4 billion, across a very large geography including a number of large, high-density cities, the successful containment within a period of two months is a notable feat.
As the rest of world now follows with different – and perhaps belated – forms of lockdown, the economic costs in totality are becoming clearer.
If lessons can be learned from China, it is that strict containment works. After that activity can normalise – helped by fiscal and monetary supports.
This article is issued by Cazenove Capital which is part of the Schroder Group and a trading name of Schroder & Co. Limited, 1 London Wall Place, London EC2Y 5AU. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Nothing in this document should be deemed to constitute the provision of financial, investment or other professional advice in any way. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested. This document may include forward-looking statements that are based upon our current opinions, expectations and projections. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those anticipated in the forward-looking statements. All data contained within this document is sourced from Cazenove Capital unless otherwise stated.