Will China Lead The Worldwide Economic Recovery?
Whether rightly or wrongly, the news cycle has focused on China’s initial and subsequent responses to the coronavirus outbreak in Wuhan province. Financial media outlets have shifted their attention to the global economic consequences of the pandemic, but that focus has largely ignored the renewed stability of China A-shares, which have been quietly outperforming other international market indices without showing excessive fluctuation.
China recovered from the 2008 global financial crisis more quickly than other economies, in no small part due to an RMB 4 trillion stimulus package that the country quickly put into place for infrastructure investment. Government stimulus packages are not a panacea because they are a catalyst for increases in local government debts, cash flow into inefficient enterprises that would not normally qualify for investment capital, and growth in loosely-regulated lending. Regardless, it is beyond question that China’s 2008 stimulus package helped pull China out from a potential downward economic spiral.
Analysts are now watching China to see if an analogous infrastructure stimulus package will be announced. Rapid advances in technology over the past decade have changed the meaning of infrastructure to include not just physical elements such as roads, ports, and railways, but also digital infrastructure, including faster 5G cellular networks, data centers and server farms, and all of the products and services required to develop that digital infrastructure.
The foundation of these digital infrastructure projects is already in place. At least 25 provincial-level regions have put new infrastructure projects in their government work reports. 21 of those regions plan to advance 5G network construction. The coronavirus pandemic appears to have little effect on the rollout of these projects. China Unicom, for example, recently reported that it will finish the construction of 250,000 5G base stations by the end of the third quarter.
Further, China’s consumer space has embraced digitization faster than almost every other major economy. As network providers ramp up their 5G capabilities, China’s cloud computing capacity will increase to better serve big data, self-driving vehicles, artificial intelligence systems, virtual offices, and internet of things (IoT) devices.
China’s imposition of homestay quarantine from late January 2020 has forced Chinese enterprises to rapidly shift to a telecommuting mode, and much of the non-manufacturing work that ended abruptly in January resumed in early February. The mobile apps that were originally developed for China’s white-collar workers, including Alibaba-backed DingTalk, Tencent Conference, and WeChat Work, are adding new in-home education and other functions that extend their utility beyond their white-collar users. Both Alibaba and Tencent added new server capacity to handle traffic that increased by orders of magnitude almost overnight. China’s willingness to invest in digital infrastructure and the transition into remote telecommuting may hold the key to solve the challenges of a coronavirus-induced slowdown in global productivity.
This is not to say that traditional spending on railways, roads, airports and urban utilities will be jettisoned in favor of digital infrastructure. Build-outs of “last mile” logistic facilities, for example, will serve the sectors of the new economy that rely on highly efficient and reliable logistics support.
As China resumes infrastructure work and production, analysts expect to see the country deploy at least RMB 3.5 trillion. That spending will fuel investments and opportunities in related industrial and infrastructure sectors. Chinese administrators will have no option but to adopt more proactive fiscal policies to accelerate infrastructure construction. All of these factors combine to create enormous opportunities for investors to profit from a recovery in China.
An important caveat is that although economists are encouraged by recent rebounds in the Chinese market, they remain divided over whether a recovery will be sharp or more gradual. China reversed course very quickly after the 2003 SARS epidemic, and some analysts predict that any current recovery will mirror China’s experience from 2003. Others look at the February 2020 decline and the subsequent March rebound and emphasize that the reversal is still below certain support thresholds, which could be an indicator of a second decline.
It is rare to find consensus among any group of economists, but the one common thread that runs through virtually every economic report is that no government stimulus will be effective if the global coronavirus pandemic is not first contained and controlled. Containment efforts are ongoing and are showing some early signs of success. The strength and pace of recovery in China and the rest of the world will ultimately be a function of these efforts as much as it will rely on government stimulus and any industrial response to the demands of infrastructure development.
Perhaps the best guidance that any investor can rely on under the current circumstances comes from Warren Buffett, who often tells investors to be greedy when others are fearful. China’s economy has shown remarkable resilience in the past. It continues to have the capacity to serve the front end of a global supply chain for goods and services. Nobody knows when the world economy will recover from the coronavirus shock, but it is safe to say that a recovery will happen. Savvy investors will use this time to take their cash and liquidity when they can and to invest wisely in the enterprises and industries that will be the first to benefit from that recovery.