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A strong performance for the Chinese economy

25-09-2020

Deze inhoud is voorbehouden aan professionele beleggers in de zin van de MiFID-richtlijn.

by Fabrice Jacob, CEO JK Capital Management Ltd., a La Française group-member company

The recent Macro numbers released by the Chinese government over the past two weeks have surpassed estimates made by macroeconomists and have contributed significantly to the very strong appreciation of the RMB against all other major currencies.

Industrial value-added has accelerated from +4.8% YoY in July to +5.6% YoY in August. Over the same time frame, capital spending rose from +6.0% YoY to +7.6% YoY, property investments from +11.6% YoY to +12.1% YoY, and retail sales have turned positive for the first time since the COVID-19 outbreak and rose from -1.1% YoY to +0.5% YoY. Sales of properties and cars have risen spectacularly to the point that China has introduced very strict measures to force property developers to deleverage their balance sheets, pushing one of the largest, Evergrande, to cut its selling prices across all its projects by 30% to reduce its debt, the steepest discount it has ever offered.

This strong activity at the time when the rest of the world is still struggling with the economic impact of COVID-19 has led to a very strong growth in import volumes (+9.5% YoY in August) but also in a drop in import value (-2.1% YoY in August, down from -1.4% YoY in July) as a result of a strong drop in global commodity prices over the past twelve months. Exports on the other hand kept on surging, up from +7.2% YoY in July to +9.5% YoY in August, still driven by masks and medical equipment, but also because many emerging countries that could be seen as manufacturing alternatives are still in lock-down or some form of lock-down (Indonesia, Thailand,  India, Philippines) whereas China has resumed all industrial activities. This has led to a trade surplus of over USD50bn per month, a level it only reached once, in 2015. Capital Economics now forecasts the current account in 2020 to reach a surplus of USD360bn, or 2.5% of China’s GDP. Our readers will remember that the community of economists was forecasting China to record a current account deficit this year prior to the outbreak of COVID-19.

As an anecdote, we came across a statistic that is an illustration of China’s consumption rebound: According to the Federation of the Swiss Watch Industry, Swiss watch exports fell 11.9% YoY to CHF1.34bn in August despite exports of watches to China having risen by +44.9% YoY in August, reaching CHF211.6m. 

Another data point we wanted to share and that also relates to consumption, and more specifically to the hospitality sector is as follows: China’s biggest hotel operator, Shanghai-based Huazhu Group that operates more than 6000 hotels and 600,000 rooms under 25 different brands (including Novotel, Mercure and Ibis for our French readers) reached an occupancy rate of 69% during the second quarter of the year, a level that is comparable to its pre-pandemic level. During the same quarter, Marriott International Inc. had a global occupancy rate of 14% and Hilton Worldwide International Inc. 22%.

The logical impact of a current account surplus hitting new highs is a strong appreciation of the RMB, the Chinese currency, that gained 2.8% against the euro over the past four weeks, 5.8% against the USD since the end of May and 2.9% against the yen since the end of July. 

Source of figures: Bloomberg

Informative Document for professional investors only as defined by MIFID II. The information contained herein is issued by JK Capital Management Limited. It is provided for informational and educational purposes only and is not intended to serve as a forecast, research product or investment advice and should not be construed as such. The information and material provided herein do not in any case represent advice, an offer, a solicitation or a recommendation to invest in specific investments.  To the best of its knowledge and belief, JK Capital Management Limited considers the information contained herein is accurate as at the date of publication. However, no warranty is given on the accuracy, adequacy or completeness of the information. Neither JK Capital Management Limited, nor its affiliates, directors and employees assumes any liabilities (including any third party liability) in respect of any errors or omissions on this report.

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