16 March 2020 by jbchevrel
Over the past few sessions, the China CDS has notably outperformed the rest of the EM complex, including Asia, on the back of the sentiment that things are going better in China. Today’s session is a good example. China 5y CDS is wider by +5 closing at 78bp, i.e. basically unchanged vs Indonesia +25bp and non-Asia EMs (wider +10/+45 as far as EM IGs are concerned). It is true that the number of new covid cases has stabilized. Now, the impact on the economy has been, so far, worse than what the consensus had expected. Is it fair to price a recovery in China already? Firstly, the activity data we have so far, released by the National Bureau of Statistics for the JAN-FEB period have confirmed double-digit contraction. Industrial production –13.5% YoY Fixed asset investment -24.5% YoY Retail sales –20.5% YoY. Industrial production decreased by -13.5% YoY, compared with +6.9% in Dec19. Upstream industries (mining) performed better than the more labour-intensive downstream ones. Consumer demand shrank across the board. Goods consumption fell, as shown by retail sales -20.5% YoY in nominal terms, partly compensated by online sales (+3% YoY growth) but that was still slower than a pre-covid +20% YoY growth rate. This was more due to supply (disruptions to logistics) than demand. People bought only food basically, no jewels or cars. Foods sales +10% YoY, beverage +3% YoY but jewellery sales -41% YoY, autos by -37% YoY. Fixed asset investment outpaced retail sales and IP, down -24.5% YoY. Construction is mainly responsible for this decline. New starts of property projects fell -45% YoY and sales fell -40% YoY. Infrastructure investment declined by -27% YoY, despite the government efforts. Manufacturing investment declined -32% YoY, reflecting the covid-linked disruptions. As discussed in a previous Grapple, the covid outbreak looks more under control, just thanks to the drastic measures taken in China, and the number of cases in China has come lower than the number of cases in the rest of the world over the weekend. What is far from clear, however is what will be the effect of cancelling all the drastic measures that have been taken. It seems unlikely that we see a sharp rebound in March. China will probably have to prolong containment measures for longer. Adding to that, not only is China seeing more imported infections, but external demand shock (US EU) is also likely to add to domestic issues. That should take Q1 GDP in China close to 0% YoY if not below, vs +6% YoY trend.