China’s economy – the first to enter lockdowns and the first to emerge from them – is restarting. We see the economy likely returning to near-trend growth by late 2020, supported by policy stimulus, especially on the monetary front. China’s economic restart – along with that in parts of Asia more broadly – underpins our modest tactical overweight in equities and credit in Asia outside Japan.
The unprecedented nature of the coronavirus shock makes alternative data sources more important than ever to sniff out emerging economic trends that official data may be slow to capture. BlackRock’s Systematic Active Equity (SAE) team has been using big data analysis to track the economic recovery as well as policy signals. One such example is the daily usage of Chinese mobile apps that help facilitate activities such as ride sharing, job hunting and travel bookings. These metrics have rebounded after a sharp dip in late January when lockdown measures were imposed, yet mostly remain below pre-virus levels. See the chart above. Job and housing related app usage is the exception, reflecting a spike in unemployment and pent-up demand. Such trends may preview how the recovery could play out across sectors elsewhere, although China’s experience is no clear roadmap for developed economies that were hit by the virus later and have undertaken different public health approaches.
We see the Chinese government’s recent economic policy actions as lending further support for the restart. The Chinese government unveiled some notable policy moves at the recent annual session of the National People’s Congress, the country’s top legislature. A shift in tone on monetary policy – potentially opening the spigot for increased credit growth– is particularly significant. It adds to fiscal stimulus that so far hasn’t been overwhelming, in our view. The government has moved away from setting an explicit 2020 growth target for gross domestic product (GDP), and is focusing on social issues including job creation as part of an ongoing effort to balance economic growth with financial and social stability. Already, industrial profits and revenues for April recovered sharply on an annual and sequential basis. Together with other positive survey data, this points to a potential strong upturn in economic growth in the second quarter.
One risk to China’s restart – and the world’s – is further deterioration in U.S.-China relations, after the pandemic has brought them to their lowest point in decades. Whatever goodwill came from the Phase 1 trade agreement has now been lost amid mutual recriminations, China’s steps to enhance its global position and a bipartisan re-assessment of the China relationship, made more pointed by the U.S. election year. Potential flashpoints include trade commitments, technology and investment restrictions and policies toward Hong Kong. A decoupling between the two countries in sensitive industries such as technology is accelerating.
The global economy is likely to have two engines of growth in the years ahead: The U.S. and Asia, centered in China. Strategic portfolios will want allocations to both regions. The U.S.-China decoupling likely only adds to this investment case — with exposures across the two regions adding diversification. For example, government bonds from the region offer higher expected returns just as developed market government bond yields have hit record lows. This is true over the tactical horizon as well, and we are overweight Asia ex-Japan equities and credit. Many Asian countries have demonstrated their ability to curb the virus spread so far and look poised for a strong economic restart. We are watching U.S.-China tensions closely as a key risk to this view.