Realities In China Weigh On Hopes For A Balanced Recovery Elsewhere

May 15, 2020

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China’s regionally lopsided economic recovery is resulting in an aggregate “blend” of V, U and L-shaped profiles. 

SHANGHAI, May 15, 2020 – Signs of economic recovery can be seen across China. However, the different economic sectors and regions within China will experience varying paces of recovery, and competing influences will shape the path of growth over the next 12 months depending on the sector concentration in each region, according to Oliver Wyman’s latest report with Silk Road Associates, a geospatial analytics provider. The present-day realities occurring in China exhibit a high possibility that a broad and balanced recovery may not come to fruition in other countries.

“Many discussions on China’s recovery tend to treat China as one single economy, while underestimating its heterogenous nature,” said Peter Reynolds, Partner and the Head of Oliver Wyman Greater China, and one of the authors of the report. “We see the recovery in China as an aggregate blend of V, U and L-shaped profiles – the weighting of each allowing for different scenarios for the overall economic picture. We expect multiple ‘mini-cycles’ to play out across the country by industry and region. It is critical to understand regional exposure, not just the overall exposure to China.” 

Exhibit 1. What might the recovery look like? A supply-side view of gross domestic product (GDP)

China’s manufacturing is experiencing a V-shaped recovery. Both official and alternative datasets, such as the Purchasing Managers' Index and NO2 pollution data, show China’s manufacturing has bounced back to its pre-pandemic level.

The impact of COVID-19 on the services sector, especially within the consumer discretionary spending subsector, has been material. As such, a U-shaped recovery is being observed. While traditional services have been challenged during the current period, COVID-19 has accelerated and so widened the gap between online and offline spending. Online services, from online healthcare, education, and wealth management, to e-groceries and other mainstream online business, have all experienced a boom in demand since the start of the outbreak.

The risk of a broad global recession leading to a material global demand-driven contraction could lead to a more prolonged L-shaped economic recovery path for China. Such a scenario has the potential to derail any potential V or U-shaped recovery. However, China is in many ways now less dependent on global exports, which currently account for 17% of GDP compared to 31% during the Global Financial Crisis. China’s lower dependency on global exports will go a long way to reducing the potential impact of any global demand shock.

Another large uncertainty is the impact of any further fiscal stimulus, of which around $300 billion has been announced thus far. Oliver Wyman believes that additional fiscal stimulus during the current crisis will be limited, given relatively high debt levels, and recognition that the last round of spending post-2008 created distortions. Much of the recent focus has been more targeted – with specific programs supporting small and medium enterprises (SMEs), and ensuring consumption is propped up.

Ben Simpfendorfer, Founder and the CEO of Silk Road Associates, and co-author of the report added, “China is ahead in re-opening the economy and dealing with a post-epidemic ‘new normal’. We do think certain facts are broadly of interest. For example, the peak return of migrant workers to China’s southern manufacturing hub occurred more than two months ago now and has not resulted in significant infections. The strict standards that have been enforced on work places have been crucial to the resumption of work and production. Separately, China’s regionally lopsided recovery weighs on the hopes for a broad and balanced recovery elsewhere. Fiscal stimulus measures should aim for a broad range of targets, as a global recession will potentially follow the COVID-19 crisis.” 

About Oliver Wyman

Oliver Wyman is a global leader in management consulting. With offices in 60 cities across 29 countries, Oliver Wyman combines deep industry knowledge with specialized expertise in strategy, operations, risk management, and organization transformation. The firm has more than 5,000 professionals around the world who work with clients to optimize their business, improve their operations and risk profile, and accelerate their organizational performance to seize the most attractive opportunities. Oliver Wyman is a wholly owned subsidiary of Marsh & McLennan Companies [NYSE: MMC]. For more information, visit www.oliverwyman.com. Follow Oliver Wyman on Twitter @OliverWyman.

About Silk Road Associates

Silk Road Associates is a leader in geospatial analytics, providing solutions for the Asian and broader emerging markets using the firm’s proprietary SRA Intelligence® analytics. We work with clients across the financial, industrial, private equity, and supply chain sectors. For more information, visit www.silkroadassoc.com.