Covid-19 & recovery; what are we learning from the Chinese experience?

Cycling to work in Beijing this week has been noticeably different, with the hustle, bustle and beeping of horns marking a change from eight weeks of empty streets. This is undoubtedly a reflection of a city trying to get back to work after two months of hibernation. 

While the nation’s capital has seen a marked change over the last few days, the country has incrementally been ramping up parts of its economy over the past few weeks. According to Bloomberg Economics, weekly activity in the economy is estimated to be at over 85% when compared to the same period last year. Automotive manufactures have nearly all returned to operations and online activity remains buoyant.

Using big data analysis, UBS’s recent report was even more positive, showing that ocean exports have fully recovered and consumption is on a healthy growth trajectory towards normalisation.

Reasons to be cautious

While there are certainly signs of optimism and things slowly returning to normal, there are still plenty of reasons to be cautious.

The reliance on external demand will continue to impact China’s manufacturing, with exports likely to take a hit over the coming weeks as the rest of the world shuts down. With China’s manufacturing sector accounting for about 40% of gross domestic product, the collapse of demand from overseas will certainly prevent a rapid V-shaped recovery.

Domestically, consumption could be slow in terms of returning to pre Covid-19 levels as consumers continue to show caution, especially if unemployment ticks up. The Chinese government is currently planning to roll out more fiscal policies to offset the economic effects and to boost domestic consumption. However, due to lingering health concerns and continued restrictions, food and beverage (F&B) and hospitality are likely to take some time to return to January’s levels.

Finally, while we are seeing domestic travel restrictions being lifted, which should boost certain elements of domestic activity, the strict quarantine measures in place are likely to reduce a significant element of foreign direct investment. 

Real estate markets a mixed bag

So how is all of this playing out in the real estate markets? In terms of the health of the various segments, overall activity is certainly returning as the country goes back to work. E-commerce fuelled logistics demand remains active; office markets are starting to see more enquiries, especially in the Tier-1 cities; while retail, hospitality and F&B are slowly seeing things pick up. 

While government policies have certainly supported many businesses, providing tax reductions and postponement, rental reductions, subsidies and financing incentives – many small and medium enterprises (SMEs) have seen their cash flows severely damaged over the last two months. While certain sectors have been more damaged, others, for example the tech sector, are likely to rebound more quickly.

The country’s residential markets which ground to a halt are now starting to see some activity (see Kate Everett-Allen’s blog), although transaction volumes are still far below last year. The impact of the last two months has weakened many developer’s balance sheets and a return to normal transaction levels will be vital to ensure the health of the industry as a whole.

In the investment markets, there remains interest in core assets in the major cities, although while international investors continue to monitor the situation, external travel restrictions/quarantine are likely to slow transactions down.

First-in, first-out (but not out of the woods)

Assuming that the country does not suffer from a second spike, China has much to show other countries around the world what a recovery from Covid-19 could look like. Certainly, the desire to get back to work and the pickup in activity are positive signs that recovery could be quick. However, China has re-emerged just as the rest of the world is going under, and the interconnectedness of China into the global economy means that while the recovery is underway, the country will continue to feel the impact of the pandemic during the coming months.