China gets back to work

07 Apr 2020

The Chinese economy is gradually recovering from the worst effects of COVID-19 and could be fully back to work by early May, according to analysis from Steven Sun at HSBC Qianhai Securities.

As uncertainty around the spread of the virus grew and a lockdown on personal movement took hold, workforce participation failed to recover from the usual Chinese New Year dip.

HSBC’s ‘work resumption barometer’, measured on a scale of 1 to 100 and based on a range of metrics including traffic congestion, air quality, coal consumption, and property sales, fell to a reading of just 20 on 8 February.

However, Chinese authorities have been easing restrictions on movement, and many factories and offices are approaching full capacity. By 25 March, HSBC’s analysis put the work resumption barometer at 65.

Many factories and offices are approaching full capacity

A full resumption depends on how effectively the national and local authorities control the risk of a secondary outbreak as people get back to normality. That means the rate of workforce return will differ.

Banks, the software sector and online entertainment are generally in good shape. The situation in primary industries such as infrastructure and industrial production is significantly better than in service sectors where the risk of human-to-human transmission is higher, like restaurants, transportation and tourism.

State-owned enterprises are doing much better than smaller businesses and private enterprises. Many companies are increasing their use of cloud office services.

The main problem now is demand. Having resumed activity, many businesses are facing a fall in appetite for their products, both domestically and overseas.

On 23 March, HSBC Economics Research lowered its year-on-year GDP growth forecast for China to -5.5 per cent in the first quarter, and 3 per cent in the second. China may also feel the force of further trade shocks as the virus spreads globally. HSBC analysts believe meaningful growth recovery is unlikely until the third quarter of the year.

For example, in the IT hardware supply chain, although disruption in production has been limited, many companies are preparing for a deceleration in shipment growth due to slowing demand and cancelled orders. Sectors dependent on exports or exposure to part of the international supply chain – such as garment and toy manufacturing, electric vehicle components and solar products – also face uncertainties as global disruption increases.

While China’s economic response to COVID-19 has been supportive, these approaching headwinds will provide further challenges. Further analysis from HSBC Global Research’s Qu Hongbin suggests that policymakers may have to get creative to shore up confidence, support businesses and lift up domestic demand.

For instance, local government bond issuance could be increased to aid infrastructure investment. Issuance already in the pipeline should lift infrastructure investment growth to 10 per cent year-on-year, but going to 15 per cent would produce a stronger economic rebound.

Beijing could also cut corporate taxes and fees permanently, and further boost bank lending, particularly to small and medium-sized enterprises who have been worst affected by the COVID-19 slowdown.

China’s monetary policy easing has so far been more muted and gradual than the action seen in other economies, but Beijing has the policy space to make bolder moves to help lift confidence as well as to help lower the cost of financing for businesses.

Mr Qu Hongbin suggests there may be a further lowering of the Loan Prime Rate, offered by commercial banks to prime clients, by 50 basis points (bp). The Medium Lending Facility could also drop by 20bp, and the deposit rate by 30bp, for the rest of 2020.

The following analyst(s), economist(s), or strategist(s) who is(are) primarily responsible for this report, including any analyst(s) whose name(s) appear(s) as author of an individual section or sections of the report and any analyst(s) named as the covering analyst(s) of a subsidiary company in a sum-of-the-parts valuation certifies(y) that the opinion(s) on the subject security(ies) or issuer(s), any views or forecasts expressed in the section(s) of which such individual(s) is(are) named as author(s), and any other views or forecasts expressed herein, including any views expressed on the back page of the research report, accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Steven Sun and Qu Hongbin

HSBC and its affiliates, including the issuer of this report (“HSBC”) believes an investor's decision to buy or sell a stock should depend on individual circumstances such as the investor's existing holdings, risk tolerance and other considerations and that investors utilise various disciplines and investment horizons when making investment decisions. Ratings should not be used or relied on in isolation as investment advice. Different securities firms use a variety of ratings terms as well as different rating systems to describe their recommendations and therefore investors should carefully read the definitions of the ratings used in each research report. Further, investors should carefully read the entire research report and not infer its contents from the rating because research reports contain more complete information concerning the analysts' views and the basis for the rating.

The target price is based on the analyst’s assessment of the stock’s actual current value, although we expect it to take six to 12 months for the market price to reflect this. When the target price is more than 20% above the current share price, the stock will be classified as a Buy; when it is between 5% and 20% above the current share price, the stock may be classified as a Buy or a Hold; when it is between 5% below and 5% above the current share price, the stock will be classified as a Hold; when it is between 5% and 20% below the current share price, the stock may be classified as a Hold or a Reduce; and when it is more than 20% below the current share price, the stock will be classified as a Reduce.

Our ratings are re-calibrated against these bands at the time of any 'material change' (initiation or resumption of coverage, change in target price or estimates).

Upside/Downside is the percentage difference between the target price and the share price.

For each stock we set a required rate of return calculated from the cost of equity for that stock’s domestic or, as appropriate, regional market established by our strategy team. The target price for a stock represented the value the analyst expected the stock to reach over our performance horizon. The performance horizon was 12 months. For a stock to be classified as Overweight, the potential return, which equals the percentage difference between the current share price and the target price, including the forecast dividend yield when indicated, had to exceed the required return by at least 5 percentage points over the succeeding 12 months (or 10 percentage points for a stock classified as Volatile*). For a stock to be classified as Underweight, the stock was expected to underperform its required return by at least 5 percentage points over the succeeding 12 months (or 10 percentage points for a stock classified as Volatile*). Stocks between these bands were classified as Neutral.

*A stock was classified as volatile if its historical volatility had exceeded 40%, if the stock had been listed for less than 12 months (unless it was in an industry or sector where volatility is low) or if the analyst expected significant volatility. However, stocks which we did not consider volatile may in fact also have behaved in such a way. Historical volatility was defined as the past month's average of the daily 365-day moving average volatilities. In order to avoid misleadingly frequent changes in rating, however, volatility had to move 2.5 percentage points past the 40% benchmark in either direction for a stock's status to change.

Buy 54% ( 31% of these provided with Investment Banking Services)

Hold 37% ( 31% of these provided with Investment Banking Services)

Sell 9% ( 24% of these provided with Investment Banking Services)

For the purposes of the distribution above the following mapping structure is used during the transition from the previous to current rating models: under our previous model, Overweight = Buy, Neutral = Hold and Underweight = Sell; under our current model Buy = Buy, Hold = Hold and Reduce = Sell. For rating definitions under both models, please see “Stock ratings and basis for financial analysis” above.

For the distribution of non-independent ratings published by HSBC, please see the disclosure page available at http://www.hsbcnet.com/gbm/financial-regulation/investment-recommendations-disclosures.

To view a list of all the independent fundamental ratings disseminated by HSBC during the preceding 12-month period, please use the following links to access the disclosure page:

Clients of Global Research and Global Banking and Markets: www.research.hsbc.com/A/Disclosures

Clients of HSBC Private Banking: www.research.privatebank.hsbc.com/Disclosures

HSBC and its affiliates will from time to time sell to and buy from customers the securities/instruments, both equity and debt (including derivatives) of companies covered in HSBC Research on a principal or agency basis or act as a market maker or liquidity provider in the securities/instruments mentioned in this report.

Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment banking, sales & trading, and principal trading revenues.

Whether, or in what time frame, an update of this analysis will be published is not determined in advance.

Non-U.S. analysts may not be associated persons of HSBC Securities (USA) Inc, and therefore may not be subject to FINRA Rule 2241 or FINRA Rule 2242 restrictions on communications with the subject company, public appearances and trading securities held by the analysts.

Economic sanctions imposed by the EU and OFAC prohibit transacting or dealing in new debt or equity of Russian SSI entities. This report does not constitute advice in relation to any securities issued by Russian SSI entities on or after July 16 2014 and as such, this report should not be construed as an inducement to transact in any sanctioned securities.

For disclosures in respect of any company mentioned in this report, please see the most recently published report on that company available at www.hsbcnet.com/research. HSBC Private Banking clients should contact their Relationship Manager for queries regarding other research reports. In order to find out more about the proprietary models used to produce this report, please contact the authoring analyst.

This report is dated as at 07 April 2020.
All market data included in this report are dated as at close 07 April 2020, unless a different date and/or a specific time of day is indicated in the report.
HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research operate and have a management reporting line independent of HSBC's Investment Banking business.

Information Barrier procedures are in place between the Investment Banking, Principal Trading, and Research businesses to ensure that any confidential and/or price sensitive information is handled in an appropriate manner.

You are not permitted to use, for reference, any data in this document for the purpose of (i) determining the interest payable, or other sums due, under loan agreements or under other financial contracts or instruments, (ii) determining the price at which a financial instrument may be bought or sold or traded or redeemed, or the value of a financial instrument, and/or (iii) measuring the performance of a financial instrument or of an investment fund.
This report may be a translation of a report authored in another language. If so, and if there is any discrepancy between versions, the original-language version shall prevail.
At the time of publication of this report, HSBC Qianhai Securities Limited does not hold 1% or more of a class of common equity securities of this company.

This report was produced and signed off by the author on 26 March 2020 at 07:20 GMT.
In order to see when this report was first disseminated please see the disclosure page available at https://research.hsbcqh.com.cn/R/34/W2JxK6Q

‘UAE’ HSBC Bank Middle East Limited, Dubai; ‘HK’ The Hongkong and Shanghai Banking Corporation Limited, Hong Kong; ‘TW’ HSBC Securities (Taiwan) Corporation Limited; 'CA' HSBC Securities (Canada) Inc.; HSBC France, S.A., Madrid, Milan, Stockholm; ‘DE’ HSBC Trinkaus & Burkhardt AG, Düsseldorf; 000 HSBC Bank (RR), Moscow; ‘IN’ HSBC Securities and Capital Markets (India) Private Limited, Mumbai; ‘JP’ HSBC Securities (Japan) Limited, Tokyo; ‘EG’ HSBC Securities Egypt SAE, Cairo; ‘CN’ HSBC Investment Bank Asia Limited, Beijing Representative Office; The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Branch; HSBC Securities (South Africa) (Pty) Ltd, Johannesburg; HSBC Bank plc, London, Tel Aviv; ‘US’ HSBC Securities (USA) Inc, New York; HSBC Yatirim Menkul Degerler AS, Istanbul; HSBC México, SA, Institución de Banca Múltiple, Grupo Financiero HSBC; HSBC Bank Australia Limited; HSBC Bank Argentina SA; HSBC Saudi Arabia Limited; The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch incorporated in Hong Kong SAR; The Hongkong and Shanghai Banking Corporation Limited, Bangkok Branch; PT Bank HSBC Indonesia; HSBC Qianhai Securities Limited; HSBC Brasil S.A. – Banco de Investimento

HSBC Qianhai Securities Limited

Block 27 A&B, Qianhai Enterprise Dream Park, 63 Qianwan Yi Road,

Shenzhen-Hong Kong Cooperation Zone, Shenzhen, China

Phone number: +86 755 8898 3288

Website: www.hsbcqh.com.cn

In the People’s Republic of China (“PRC”) (Excluding special administrative regions of Hong Kong and Macao), this document is issued and approved by HSBC Qianhai Securities Limited for the information of its clients only; it is not intended for and should not be distributed to retail customers in the PRC. HSBC Qianhai Securities Limited is regulated by the China Securities Regulatory Commission (“CSRC”) and is qualified to engage in Securities Investment Advisory Business in the PRC [91440300MA5EPLHG1B]. All inquiries by recipients must be directed to the HSBC Qianhai Securities Limited contact in the PRC. If it is received by a customer of an affiliate of HSBC Qianhai Securities Limited, its provision to the recipient is subject to the terms of business in place between the recipient and such affiliate. This document is being supplied to you solely for your information and may not be redistributed or passed on, directly or indirectly, to any other person, in whole or in part, for any purpose. This document is not and should not be construed as an offer to sell or solicitation of an offer to purchase or subscribe for any investment. HSBC Qianhai Securities Limited has based this document on information obtained from sources it believes to be reliable but which it has not independently verified; HSBC Qianhai Securities Limited makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. The decision and responsibility on whether or not to purchase, subscribe or sell (as applicable) must be taken by the investor. No consideration has been given to the particular investment objectives, financial situation or particular needs of any recipient. Any form of written or verbal commitment on the sharing of gains or losses from the securities investment between the investors and the HSBC Qianhai Securities Limited arising from the research services provided are not permitted and shall be invalid. Expressions of opinion are those of the Research Division of HSBC Qianhai Securities Limited only and are subject to change without notice. From time to time research analysts conduct site visits of covered issuers. HSBC Qianhai Securities Limited and its affiliates and/or their officers, directors and employees may have positions in any securities mentioned in this document (or in any related investment) and may from time to time add to or dispose of any such securities (or investment) to the extent permitted by law. HSBC Qianhai Securities Limited and its affiliates may act as market maker or have assumed an underwriting commitment in the securities of companies discussed in this document (or in related investments), may sell them to or buy them from customers on a principal basis and may also perform or seek to perform investment banking or underwriting services for or relating to those companies and may also be represented on the supervisory board or any other committee of those companies. This document may contain hyperlinks to external websites for convenience of its recipients. HSBC Qianhai Securities Limited are not responsible for any content therein. HSBC policies prohibit research analysts from accepting payment or reimbursement for travel expenses from the issuer for such visits.

The Hongkong and Shanghai Banking Corporation Limited owns 51% and Qianhai Financial Holdings Co., Ltd. (“QFH”) owns 49% of shares in HSBC Qianhai Securities Limited, which prepared and/or contributed to this research report. HSBC Qianhai Securities Limited has established policies and procedures reasonably designed to prevent QFH from exercising direct or indirect influence over the content of HSBC Qianhai Securities Limited research reports and the choice of companies that will be the subject of research reports. Furthermore, HSBC Qianhai Securities Limited has established additional policies and procedures reasonably designed to prevent any person or entity, whether from within HSBC Qianhai Securities Limited, QFH or otherwise, from influencing the activities of the HSBC Qianhai Securities Limited’s research analysts or the content of research reports.

The information and opinions in this research report were distributed by The Hongkong and Shanghai Banking Corporation Limited in Hong Kong, which accepts legal responsibility for its contents. This research report is intended to provide information to The Hongkong and Shanghai Banking Corporation Limited's institutional and professional investor (as defined in Schedule 1 to the Securities and Future Ordinance (Cap. 571)) ("SFO") customers only; it is not intended for and should not be distributed to customers in Hong Kong who are not "professional investors". The Hongkong and Shanghai Banking Corporation Limited is regulated by the Hong Kong Monetary Authority. The Hongkong and Shanghai Banking Corporation Limited makes no representations that the products or services mentioned in this document are available to persons in Hong Kong. Any enquiries with respect to any matters arising from, or in connection with, this research report should be directed to the recipient’s contact person at The Hongkong and Shanghai Banking Corporation Limited. The analyst(s) named in this research report who is(are) not employed by and/or accredited to The Hongkong and Shanghai Banking Corporation Limited is(are) not licensed to carry on any regulated activities in Hong Kong under the SFO. The analyst(s) is(are) only named in this research report as being a source of the information contained herein and does(do) not purport to carry on any regulated activities in Hong Kong under the SFO or hold himself/herself(themselves) out as being able to do so.

HSBC Securities (USA) Inc., a US-registered broker-dealer and member of FINRA, accepts responsibility for the content of this research report prepared by its non-US foreign affiliate. All U.S. persons receiving and/or accessing this report and wishing to effect transactions in any security discussed herein should do so with HSBC Securities (USA) Inc. in the United States and not with its non-US foreign affiliate, the issuer of this report. In the UK this report may only be distributed to persons of a kind described in Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005. The protections afforded by the UK regulatory regime are available only to those dealing with a representative of HSBC Bank plc in the UK. In Singapore, this publication is distributed by The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch for the general information of institutional investors or other persons specified in Sections 274 and 304 of the Securities and Futures Act (Chapter 289) (“SFA”) and accredited investors and other persons in accordance with the conditions specified in Sections 275 and 305 of the SFA. Only Economics or Currencies reports are intended for distribution to a person who is not an Accredited Investor, Expert Investor or Institutional Investor as defined in SFA. The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch accepts legal responsibility for the contents of reports pursuant to Regulation 32C(1)(d) of the Financial Advisers Regulations. This publication is not a prospectus as defined in the SFA. This publication is not a prospectus as defined in the SFA. It may not be further distributed in whole or in part for any purpose. The Hongkong and Shanghai Banking Corporation Limited Singapore Branch is regulated by the Monetary Authority of Singapore. Recipients in Singapore should contact a "Hongkong and Shanghai Banking Corporation Limited, Singapore Branch" representative in respect of any matters arising from, or in connection with this report. Please refer to The Hongkong and Shanghai Banking Corporation Limited Singapore Branch’s website at www.business.hsbc.com.sg for contact details. In Australia, this publication has been distributed by The Hongkong and Shanghai Banking Corporation Limited (ABN 65 117 925 970, AFSL 301737) for the general information of its “wholesale” customers (as defined in the Corporations Act 2001). Where distributed to retail customers, this research is distributed by HSBC Bank Australia Limited (ABN 48 006 434 162, AFSL No. 232595). These respective entities make no representations that the products or services mentioned in this document are available to persons in Australia or are necessarily suitable for any particular person or appropriate in accordance with local law. No consideration has been given to the particular investment objectives, financial situation or particular needs of any recipient. This publication is distributed in New Zealand by The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch incorporated in Hong Kong SAR.

In Japan, this publication has been distributed by HSBC Securities (Japan) Limited. It may not be further distributed in whole or in part for any purpose. In Korea, this publication is distributed by The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch ("HBAP SLS") for the general information of professional investors specified in Article 9 of the Financial Investment Services and Capital Markets Act (“FSCMA”). This publication is not a prospectus as defined in the FSCMA. It may not be further distributed in whole or in part for any purpose. HBAP SLS is regulated by the Financial Services Commission and the Financial Supervisory Service of Korea.

In Canada, this document has been distributed by HSBC Securities (Canada) Inc. (member IIROC), and/or its affiliates. The information contained herein is under no circumstances to be construed as investment advice in any province or territory of Canada and is not tailored to the needs of the recipient. No securities commission or similar regulatory authority in Canada has reviewed or in any way passed judgment upon these materials, the information contained herein or the merits of the securities described herein, and any representation to the contrary is an offense. In Brazil, this document has been distributed by HSBC Brasil S.A. – Banco de Investimento ("HSBC Brazil"), and/or its affiliates. As required by Instruction No. 598/18 of the Securities and Exchange Commission of Brazil (Comissão de Valores Mobiliários), potential conflicts of interest concerning (i) HSBC Brasil and/or its affiliates; and (ii) the analyst(s) responsible for authoring this report are stated on the chart above labelled "HSBC & Analyst Disclosures".

If you are an HSBC Private Banking (“PB”) customer with approval for receipt of relevant research publications by an applicable HSBC legal entity, you are eligible to receive this publication. To be eligible to receive such publications, you must have agreed to the applicable HSBC entity’s terms and conditions (“KRC Terms”) for access to the KRC, and the terms and conditions of any other internet banking service offered by that HSBC entity through which you will access research publications using the KRC. Distribution of this publication is the sole responsibility of the HSBC entity with whom you have agreed the KRC Terms.

If you do not meet the aforementioned eligibility requirements please disregard this publication and, if you are a customer of PB, please notify your Relationship Manager. Receipt of research publications is strictly subject to the KRC Terms, which can be found at https://research.privatebank.hsbc.com/ – we draw your attention also to the provisions contained in the Important Notes section therein.

© Copyright 2020, HSBC Qianhai Securities Limited, ALL RIGHTS RESERVED. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of HSBC Qianhai Securities Limited.

MCI (P) 077/12/2019, MCI (P) 016/02/2020