How has China dealt with the coronavirus crisis?

China was first in, first out of the coronavirus crisis.

It's not completely out of the woods just yet, and China will continue to deal with clusters of the virus like the rest of the world. But it was the first country to report an outbreak, and the first to stage some form of economic recovery.

Where it all began

In January, Wuhan, where the virus emerged, was the first area to enter lockdown in an attempt to quarantine the virus. Hubei's capital is an important hub in central China, financially, economically, socially and culturally. It has close links with other Chinese provinces and key transport links to the rest of the country.

Home to a population of 11m, Wuhan's lockdown was bound to cause disruption. But its experience provides important lessons for the rest of the world. Strict quarantine measures appeared to be a success and, by early March, reported virus cases dropped to less than 100 nationally per day.

Policy makers didn't stop there. Even as factories and other manufacturing facilities started to reopen, new and existing measures were put in place. This included wearing masks, temperature checks, social distancing, hand washing and contact tracing. Other smartphone applications like those that track individuals' health were also set up. Electronic wristbands have also been used as a way to make sure carriers of the virus remain in quarantine.

Impact on the economy

There's no doubt China, as well as other Asian nations, have learnt important lessons from previous pandemics. That said, China's economic output has still been damaged, and growth contracted earlier in the year. As a result, the Central Bank of China brought in measures to help stimulate the economy.

Again, these measures reflected what China has learnt from previous crises. After the 2008 financial crisis, China accumulated masses of debt to fund its economic recovery. But this time around it's taken a more cautious and targeted approach. China has since seen a rebound in the economy, and growth forecasts are expected to recover further over the coming year.

The country isn't firing on all cylinders just yet though, and some areas are likely to come back slower. Companies that rely heavily on exports are more likely to struggle in the short term. Demand for services from the restaurant, catering, leisure and entertainment sectors could also remain low. On the other hand, sectors and companies that rely more on domestic demand are expected to fare better.

In terms of retail, there’s a clear difference between online and offline activity. If anything, the coronavirus has accelerated trends that were already in place prior to the virus, including the use of technology to make our daily lives better.

There's been a significant increase in the use of e-commerce, online shopping, gaming, and education. Even China's older population, who tended to prefer shopping in person, have learned how to do things differently and online. Lots of people have become more open minded about how tech can make life more convenient.

The size of China's e-commerce market is already much larger than other big economies like the US. Yet only 61.2% of China's population has internet access compared to 89.5% in the US. This means there's scope for more people in China to eventually get internet access, and boost e-commerce and other online activity. Companies that do most of their business online, or are heavily related to tech in some way, could be set to benefit.

What does this mean for investors?

Investors have generally rewarded China for its effective containment of Covid-19. The performance of some global stock markets reflects what stage each country is in. That means China has held up relatively well, as the market is rewarding those countries or sectors that have handled the virus more efficiently. As always though past performance isn't a guide to future returns.

Performance - China vs. world markets

Past performance is not a guide to the future. Source: Lipper IM to 31/07/2020.

Investors have also favoured companies that provide convenient services, online shopping and education, entertainment, social media platforms, and ways of staying connected. It means China's tech sector, as well as other consumer services businesses, have performed strongly so far this year. The healthcare sector has also held up well.

Other areas like financials haven't done so well. Global banks have been weaker this year as, alongside low interest rates, they’re expected to deal with loan losses following this crisis.

Performance - China sectors

Past performance is not a guide to the future. Source: Lipper IM to 31/07/2020.

We recently spoke to Martin Lau, a long-term investor in China and lead manager of the First State Greater China Growth fund, about these market trends.

He says there are currently two types of company – those that have benefited from the trends accelerated by the virus, including many tech businesses, and those that have been negatively affected, including the retail and tourism sectors. Lau sees it as his role to spot those that will ultimately emerge from the crisis stronger. Some companies, for example, have used this period as an opportunity to assess their costs and look at how they can make long-term savings.

Similar to the US tech sector, China is dominated by a few large firms. This includes Tencent, Alibaba and JD.com. Between them they offer a range of services, including e-commerce, gaming, social media, and payment services.

Lau has invested in Tencent for many years, but in the past he's had concerns about corporate governance standards at other tech firms. After carrying out extensive analysis and due diligence, the manager is now more upbeat about governance standards. He thinks these businesses could benefit from the growing use of tech following the coronavirus outbreak. He used market volatility earlier in the year to add investments in both Alibaba and JD.com at attractive share prices.

The strength of these businesses over the years means they've become an increasingly large part of the Chinese stock market. If they continue to do well, funds with higher weightings to them will benefit, while those without will miss out. But the reverse is also true and these companies could experience setbacks too. If they don't meet the high expectations lots of investors currently place on them, their share prices could fall.

What else should investors consider?

Another elephant in the room for China is its standoff with the US.

Ongoing political wrangling is unlikely to abate in the near term. We've already seen the world's two largest economies come to blows over trade and related tariffs, and more recently over sanctions against telecoms company Huawei.

Overall, we're generally seeing more bark than bite come out of the US. It might not want to push China too far, especially if the US wants to see a rebound in the economy sooner rather than later. That said, President Donald Trump might want to be seen to be doing more, in order to appease his voters in the run up to November's presidential election.

Martin Lau thinks China is getting stronger, and the government is increasingly prepared to fight back against anyone wanting to restrain its growth. The geopolitical backdrop is likely to continue to cause periods of market volatility, but Lau thinks it’s important to remain focused on the prospects of individual companies, rather than broader economic or market sentiment. Even when we do see swings in investor feelings, any associated share price volatility could give the opportunity to invest in shares at more attractive prices.

This article isn’t personal advice. If you’re not sure an investment is right for you seek advice. Investments rise and fall in value, so you could get back less than you invest.

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