Commentary on Political Economy

Tuesday, 14 April 2020

The view from space: China’s recovery hasn’t happened yet

Workers at the Dongfeng Honda factory in Wuhan last week. Picture: AP
Workers at the Dongfeng Honda factory in Wuhan last week. Picture: AP
Investors are watching China for clues about how the global economy — and the US economy specifically — will pick up once the spread of the coronavirus slows and lockdowns lift. They should be wary.
Official reports from the Chinese government, a set of closely followed purchasing managers’ indexes, recently showed that Chinese manufacturing and service-sector activity unexpectedly expanded in March after suffering the worst contractions on record in February.
Some investors and economists found in the news reason to be optimistic about the ability of economies around the world to rebound quickly once the virus threat dissipates.


That optimism, of course, requires an assumption that the data are accurate. China’s economic data have always been suspect, and that’s not to mention questions surrounding the reporting of its coronavirus numbers.
The outbreak has no doubt impaired the ability of surveyors to collect data, and there’s also the nature of the PMI reports: The numbers are relative, not absolute, and simply reflect the direction — not the magnitude — of business activity.
“It would be nice to believe that China could come back quickly. In theory, if they can do it, we can do it,” says Carl Weinberg, CEO at High Frequency Economics.
Yet even if the Chinese data are assumed reasonably accurate, Weinberg says investors should be cautious in extrapolating too much.
China enforced much stricter lockdowns and managed to keep the virus pretty well contained to one province. That province, Hubei, is the size of Italy, but it’s not as core to the Chinese economy as, say, the New York City region is to the US.
There’s a bigger reason than faulty extrapolations and scepticism over flawed PMI reports to question the notion that a Chinese economic rebound is under way: Outside observers aren’t seeing it.
SpaceKnow, a New York-based company that monitors economies around the world from space, shared weekly data that it compiles from three satellites that collect infrared signals from China.
The company’s Broad Activity Index — based on infrared data from more than 5000 locations across China’s supply chain — shows deep, ongoing contraction.
The Broad Activity Index, last updated with satellite data on April 5, stands at minus 0.2. That is the lowest since reports emerged of coronavirus in Wuhan.
“The SpaceKnow data suggest a continued slowing in China’s economy, despite official data saying otherwise,” says Jeremy Fand, SpaceKnow’s chief executive.

Lower demand

Pollution data from SpaceKnow, collected via satellite by measuring things like methane and ozone over China, also suggest that activity remains depressed compared with pre-virus levels. That index, last updated on March 30, is unchanged from the end of February.
That’s not to say China hasn’t started going back to work. Luminosity, or “night light” data, shows that China isn’t dark, though Fand adds that the country never really did go dark during the pandemic — hospitals popped up as factories closed, and some probably retooled to make things like masks and respirators.
Rather, he says, China is probably facing weakened demand for its goods as much of the rest of the world grapples with the pandemic. “Our data suggest supply has diminished because there’s nothing to sell,” Fand says.
Regardless of why China’s activity remains lower than officially reported — whether it’s the virus, frozen demand, or a combination of factors — the point is that the country hasn’t yet begun to rebound.
Separate data, provided by analysts at Gavekal Research, show that coal use by major Chinese power producers as well as property sales across large cities remain well beneath previrus levels. Traffic congestion across 100 Chinese cities, however, has started rising back to more normal levels as lockdowns have eased.
The state of China’s economy right now reflects how dependent it is on the US and other buyers as much as it undermines optimism that the US could have a recovery that resembles more of a V-shape than a U-shape.
While there are some good reasons to believe that the US economy’s rebound could be robust once it begins — the unprecedented amount of fiscal and monetary stimulus chief among them — China’s ostensible recovery isn’t yet one of them.

No one knows when the coronavirus will end, how deep the economic toll will be, and what the recovery will look like. Investors looking for clues should view Chinese data with scepticism, and they should resist over interpreting green shoots. Some of them won’t apply here, and some could signal more pain than prosperity.

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