Return of China’s massive domestic consumption


We remain constructive on China equities in the growth side of the Barbell Strategy
Chief Investment Office14 Oct 2020
Photo credit: AFP Photo


Mammoth domestic consumption. The coronavirus pandemic has dramatically changed the lives of many since the start of 2020. This includes spending patterns, travelling habits, daily lifestyles, and work schedules. China saw a spike in cases between 27 January and 14 February, when an average of 4,000 new cases were reported daily. Since the start of September, total confirmed cases have been contained at the 90,000 range with mortality rate kept around 5% (Figure 1).

China, one of the first countries to report COVID-19 cases, is also among the first to show success in containing the virus. Stringent measures were imposed to lock down cities and towns, limiting people’s movements. Measures to contact trace and speed up treatment of patients were also implemented. These measures have borne results. After record daily cases peaking between mid-February and mid-March (Figure 2), the number of daily new cases started to trend downwards and remained within control (Figure 3), setting up a prelude to the re-opening of China’s domestic economy. The spike in daily cases at the end of July was dealt with by immediate lockdowns and mass testing and was contained within weeks.

Makeshift hospitals closed. Two makeshift hospitals and 14 makeshift health centres, armed with more than 40,000 medical personnel from all over the country, were constructed to treat the influx of COVID-19 patients. As new cases subsequently subsided, 14 out of 16 of the makeshift hospitals and centres around Wuhan have been shut down.

Lives moving back to normal. Large populations are often associated with massive spending power – a demographic advantage which China possesses. With its services sectors making up 54% of total gross domestic product (GDP), the significance of China’s domestic spending cannot be ignored. This is evident in the economy’s better-than-expected GDP growth of 3.2% in 2Q20, which has delivered a “V-shape” recovery.

Figure 1: COVID-19 cases in China, as at 9 October 2020

Source: Bloomberg, DBS

Return of China’s massive domestic consumption

Mammoth domestic consumption. The coronavirus pandemic has dramatically changed the lives of many since the start of 2020. This includes spending patterns, travelling habits, daily lifestyles, and work schedules. China saw a spike in cases between 27 January and 14 February, when an average of 4,000 new cases were reported daily. Since the start of September, total confirmed cases have been contained at the 90,000 range with mortality rate kept around 5% (Figure 1).

China, one of the first countries to report COVID-19 cases, is also among the first to show success in containing the virus. Stringent measures were imposed to lock down cities and towns, limiting people’s movements. Measures to contact trace and speed up treatment of patients were also implemented. These measures have borne results. After record daily cases peaking between mid-February and mid-March (Figure 2), the number of daily new cases started to trend downwards and remained within control (Figure 3), setting up a prelude to the re-opening of China’s domestic economy. The spike in daily cases at the end of July was dealt with by immediate lockdowns and mass testing and was contained within weeks.

Makeshift hospitals closed. Two makeshift hospitals and 14 makeshift health centres, armed with more than 40,000 medical personnel from all over the country, were constructed to treat the influx of COVID-19 patients. As new cases subsequently subsided, 14 out of 16 of the makeshift hospitals and centres around Wuhan have been shut down.

Lives moving back to normal. Large populations are often associated with massive spending power – a demographic advantage which China possesses. With its services sectors making up 54% of total gross domestic product (GDP), the significance of China’s domestic spending cannot be ignored. This is evident in the economy’s better-than-expected GDP growth of 3.2% in 2Q20, which has delivered a “V-shape” recovery.

Figure 1: COVID-19 cases in China, as at 9 October 2020

Source:  Bloomberg, DBS

Barometer of recovery. China appears to be well on the road to recovery, with domestic activities picking up pace as seen from domestic passenger air traffic data. Monthly domestic air passenger traffic rebounded to 39m passengers in July while revenue passenger kilometre (RPK) also rebounded strongly to CNY55b (Figure 4). Both hit the trough of 7m passengers and CNY11b in February during the height of the pandemic. Another popular mode of domestic long-distance transport, the railway, also experienced a near return to normal where monthly passenger numbers bounced back to 250m in August after bottoming in February (Figure 5). These figures are expected to increase in

September and October as the overall domestic situation continues returning to normalcy.

In parallel, retail sales demonstrated an encouraging recovery with positive 0.5% y/y growth in August after five consecutive months of y/y declines (Figure 6). This figure is no doubt a shot in the arm to boost confidence among local businesses, the masses, and the investors. With COVID-19 kept under control, consumers are gradually increasing their spending again, although this trend is yet to be as prevalent in some layers of society.

Golden Week holiday. The absence of crowds at usually bustling tourist attractions just months ago was unthinkable. This seems to be in passé – domestic tourism sprung back to life during China’s Golden Week holiday, which took place from 1-8 October. In this period, some 637m local tourists – about 78% of last year’s number – spent a total of CNY467b (USD68.8b). This is equivalent to 0.5% of China’s GDP.

Large crowds were seen along the Great Wall of China, and tour groups from other provinces visited tourist hotspots along The Bund in Shanghai while donned in face masks. Similar sights were observed in Huang Shan of Anhui Province and Xi-Hu (Westlake) in Hangzhou.

Figure 2: Record daily cases peaked in mid-February

Source: Bloomberg, DBS

Figure 3: Daily new cases dropped steadily, remaining under control

Source: Bloomberg, DBS

Figure 4: Domestic air traffic and RPK rebounded strongly

Source: Bloomberg, DBS

Figure 5: Railway passenger volume bounces back to near normal

Source: Bloomberg, DBS

Figure 6: Retail sales demonstrates encouraging recovery

Source: Bloomberg, DBS

Recovery on track. The recovery in China’s domestic economy and corporate earnings outlook should persist as the economy and its large population move in unison towards the pre-pandemic way of life. Bouncing back from the plunge caused by COVID-19 in the early part of the year, profits and output of industrial and manufacturing sectors (Figure 7) have recovered strongly as factories reopen and industrial activities surge.

Focus on the winning sectors. The main sectors that will benefit from this recovery and pent up spending propensities will be businesses serving local consumers or catering for export demand. These include e-Commerce ecosystems, New Economy sectors, large banks, insurance companies, construction services, technology components, and manufacturing. We are also constructive on discretionary luxury goods, leisure activities, and consumer services as travel restrictions, quarantine rules, the absence of accessible international travel, and the persistent large number of COVID-19 cases globally are directing China’s mammoth consumer population to spend at home instead.

Year-to-date, China equities were among the best performing globally. In USD terms, China’s Internet sector surged 40% while China’s Technology sector gained 34%, followed by Shenzhen and Shanghai A-shares which rose 29% and 11%, respectively, ahead of most major global peers.

We maintain our conviction on China equities as they derive the majority of their revenue and earnings from domestic operations. The 15 largest constituents in A-shares and the MSCI China Index obtained 97% and 92% of their revenue from domestic operations, while that of the top 15 from H-shares and China technology companies correspondingly stand at 86% and 68% (Figure 8). With domestic activities showing clear signs of normalising and picking up pace, we are confident that China equities in the growth side of the Barbell Strategy will maintain their remarkable performance.

Figure 7: Rebound in earnings outlook

Source: Bloomberg, DBS

Figure 8: Domestic revenue mix of top-15 constituents

Source: Bloomberg, DBS

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