The Deloitte Research Monthly Outlook and Perspectives

Economy

Focused fiscal relief to counter the coronavirus 

The coronavirus hit the Chinese economy unexpectedly in January 2020. Within weeks, many countries have drastically reduced or even closed air traffic with China. Financial markets reacted strongly with the Hang Seng Index (a proxy for the Chinese economy) tumbling nearly 6 percent in the last week of January; the US equity market, which had posted impressive gains in 2019 (about 30 percent), gave back much of those gains in January. The widely-watched US 10-year Treasury yield fell to 1.51 percent last week, from 1.88 percent at the beginning of 2020, suggesting investors are becoming more risk-averse and began to discount a recession in the US. Usually volatile commodities prices had a roller-coaster ride last week (iron ore closed at USD83/ton in January, compared to USD92 a month earlier). The long-awaited resumption of trading in A shares held no surprise, with the Shanghai index down more than 8 percent in the early session after the CNY holidays. However, trading of asset markets (the US, Hong Kong and A-shares) seem to suggest that investors have taken the view that the impact of the virus is expected to be one-off.

A sharp slowdown in Q1

The most relevant questions around the epidemic concern: 1) the economic impact on China; 2) spillover effects on the global economy; 3) the ramifications of China's policy responses. If history is any guide, the SARS outbreak which emerged from Beijing in 2003 is clearly the most relevant benchmark from the perspectives of infection, fatality rates and duration. In the end, 2003 turned out to be a reasonably good year for the Chinese economy, because pent-up demand in 2H powered it ahead once the worst was over. Of course, one could also argue that China, along with Emerging Asia, had then just come out of the Asian Financial Crisis, with low asset valuations, low leverage and an under-valued RMB, which made reflation much easier. The economy was due a recovery and China's accession to the WTO (in November 2001) began to yield dividends. Today, the economy is gradually maturing. Even 6 percent GDP growth requires some fiscal stimulus. Importantly, the Chinese economy is facing headwinds structurally and cyclically (please see the most recent Voice of Asia).

In December 2019, our forecast for China's 2020 GDP growth was 5.8 percent, a shade lower than 6 percent, the implicit official growth target. We also assumed fiscal stimulus would be moderate given corporate debt levels. The coronavirus has clearly changed the forecast and policy mix. The economy was immediately hit by contracting activity related to the transportation and hospitality sectors. If governments further delay the dates for companies to resume work (currently by late February) in light of the incubation period of the virus, most SMEs, especially those with thin margins and high fixed costs, could feel a severe pinch. However, if the Government can sustain measures aimed at containing the virus, at the cost of economic activities, normality could slowly resume by Q2.

Based on our observations, the Government has continued to ratchet up these measures. For example, people's movements are being tracked simultaneously by employers and local communities. If the number of confirmed infections starts to peak, calm will slowly take hold. So far, the fatality rate of the new coronavirus is relatively low, and much lower among the young, suggesting older people with pre-existing vulnerabilities have been much more affected.  Assuming containment measures bite—there is a decline in the number of people affected—the impact on corporate investment is likely to be insignificant, but consumption and trade will certainly take a hit in Q1.

However, desperate times call for desperate measures, as the saying goes. We expect policymakers to come up with a slew of policies including fiscal relief and monetary easing before the end of the extended Chinese New Year holiday. Again, the comparative advantages of China's governance model—swift execution of central government policies—will be on full display.

Beijing's toolkit

Let's look at what's in China's policy toolbox. The People's Bank of China (PBOC) could easily slash the reserve requirement ratio (RRR) for commercial banks several times this year. The goal would not be to boost banks' profitability, rather to act as an incentive for banks to provide credit in a more focused manner to those affected by the epidemic. In other words, PBOC should do everything it can to alleviate a liquidity crunch.

The most recent monetary easing (last November) was merely 5bps, suggesting the PBOC purposefully saved ammunition for "desperate times". The current epidemic clearly warrants all sorts of counter-cyclical measures including influencing the RMB exchange rate. The completion of the Phase 1 trade deal with the US has resulted in a ferocious rally of the RMB against the dollar. Why not keep a more flexible RMB exchange rate as an additional lever of monetary easing? In addition to counter-cyclical measures, the Chinese Government could implement a moratorium on tax filings for SMEs. Moreover, it could also step in through procurement. In short, China has ample policy leeway to support reflation against the backdrop of a benign inflation outlook.  

Chart: China's war chest

Spillover unlikely to change global inflation dynamics

Based on our baseline scenario, which can be summed up as a sharp slowdown of consumption in Q1, but higher pent-up demand in 2H propelled by counter-cyclical measures, spillover effects will be mainly seen in economies which have either close links with China (e.g. Australia, Southeast Asia and Korea) or strong dependency on Chinese tourism (e.g. HKSAR, Vietnam, and Thailand). However, even for these two types of economies, the impact is expected to be transitory. For example, if China's steel sector had not held up in recent years, it would have been unthinkable for iron ore prices to have reached their current elevated level. Again, in our baseline scenario, damage will center on transportation and hospitality related activities, not the manufacturing sector, unless the Government fails to contain the outbreak.

Chart: China's growing global economic impact

In conclusion, the epidemic, whose duration remains difficult to predict, has prompted us to revisit our key forecasts for the Chinese economy.

So far, revisions in the market on GDP growth range from 0.1 percent to 1.2 percent. We are more sanguine and see a different growth trajectory (bad Q1, flat Q2 and V-shaped recovery in 2H). Estimated GDP growth of 5.3 percent to 5.5 percent is therefore a more plausible scenario. There is one caveat: even if the coronavirus is behind us, commitment to the Phase 1 trade deal could well become a focal point during this US election year. Unlike in 2003, how Beijing will reflate the economy will have a profound global impact. That is why the guiding principle for stabilizing the economy and ultimately ensuring social stability is to focus most fiscal relief on SMEs, which are more vulnerable to economic shocks. 

Sector impact overview

Consistent with what we predict for coronavirus' impact on the macro-economy, the epidemic will have a limited medium-to-long term impact on most industries, and their growth trends will not be fundamentally changed.

The consumer sector, which contributes the most to economic growth, will be the one that hurts the most. In the first half of this year, catering, retail, and travel services will all experience tremendous cash flow pressure due to declining sales and high fixed costs, and the shortfall in cyclical consumption will not be made up after the epidemic.

However, the consumer goods industry, where e-commerce is heavily weighted, especially in daily necessities, can easily recover as soon as the consumption environment stabilizes. At the same time, the importance to incorporate retail technology into local living has been highlighted in this crisis.

In contrast, impact on manufacturing is rather limited. In the short term, influence lies mainly in supply chain obstructions and difficulty in recovering production due to the delayed return of workforces, lack of personnel mobility, and traffic restrictions. In the long term, manufacturing industry should get back on track.

The coronavirus has brought about opportunities for life sciences and medical service industries. Since shortages in medical supplies and medicines related to the epidemic have begun, prevention and control of infectious diseases, as well as upgrade in medical service systems, will be further emphasized, attracting more R&D resources and investment.

The tech sector is also a likely beneficiary in this crisis, particularly online education, online entertainment and telecommuting platforms. Advanced technologies such as AI, big data and the cloud are helping fight the battle against the coronavirus and improving operational efficiency.

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Financial Services

Liquidity easing to stabilize the economy

On 1 January, PBOC announced an RRR reduction of 0.5 percentage points. Then, on 3 January, 2025 Plan for the banking and insurance industries was introduced with the goal of building a modern financial enterprise system to provide long-term funds and support direct financing development. However, not long afterwards, rapid outbreak of the coronavirus infection around Spring Festival began to have a huge negative impact on the real economy, especially small and medium-sized enterprises.

To maintain abundant liquidity of the banking system and stability of the money market during such a key period for prevention and control of the outbreak, PBOC provided a further liquidity boost of RMB1.2 trillion through open market operation, which is expected to bring down interest rates slightly lower. Looking ahead, low cost medium and long term funds will be gradually injected into the market, stabilizing the economy and capital markets.

Interest rates expected to fall

At the start of 2020, PBOC's cut of RRR has released more than RMB800 billion to bridge the Spring Festival liquidity gap, and another RMB1.2 trillion was then injected to support epidemic prevention and control. At the same time, control measures related to the outbreak have made cash flow situation urgent for many small and medium-sized enterprises. PBOC's liquidity release will drive down interest rate, reduce the cost of funds and relieve financial pressure on enterprises.

Financial institutions have started to provide loans (based on special preferential interest rates) to medical and related living materials enterprises that are specifically managed by the government. Credit loans extended by financial institutions are expected to increase substantially in the coming weeks.

At present, the economy is still under severe downward pressure. To lower total financing cost, it is essential to take precautions to provide banks with low-cost funds. From this perspective, we think monetary easing will promote an economic recovery and stabilize stock and bond markets. This also confirms the subtle change in monetary policy expressions at the recent Central Economic Work Conference—from "moderate tightness" to "flexible and moderate"—that is, to maintain growth of broad money M2 and total social financing in line with GDP growth, optimize Loan Prime Rate (LPR) transmission and support banks' supplementary capital by issuing perpetual bonds. This multi-pronged approach to maintaining abundant liquidity shows "PBOC as a political authority" able to carry out work on the "six stabilities" (maintaining employment and keeping the financial sector, foreign trade, foreign and domestic investments, and expectations stable).

2025 Plan – promising development of modern finance

China Banking and Insurance Regulatory Commission formally released its Five-Year Plan on 3 January, which by 2025 aims to achieve a better financial structure, form a multi-layered, wide coverage and differentiated network of banking and insurance institutions, and establish a distinctive modern financial enterprise system. Key areas of the financial sector will develop the following characteristics:

Banking: clearer positioning for different tiers of banks

1) Large banks to be stronger with a more enhanced level of comprehensive financial services. In 2020, China’s five state owned banks are supposed to achieve a 20 percent increase in small and micro inclusive loans. 2) Joint-stock commercial banks should position to serve differentiated markets with constantly increasing core competitiveness and distinctive business models to improve comparative advantages, such as retail banking at China Merchants Bank and fintech strategy at Ping An Bank. 3) Provincial small and medium-sized banks should position their "reasonable business scope" to serve local economies, residents and small and micro enterprises.

Insurance: accelerate development of weak areas

1) The optimization of the mechanism to diversify agricultural insurance disaster risk is on the agenda. The establishment of China Agricultural Reinsurance Company is expected to accelerate. 2) Opening-up will promote the development of health insurance and pensions insurance. Entry conditions and share ratio restrictions on foreign insurance companies are gradually being eased. Opening of the first wholly foreign-owned insurance company, Allianz (China) Insurance Holdings Co., was officially approved in November 2019, which is another positive signal. In future, more large multinational insurance institutions will promote their China market layouts, which will boost development of currently weak insurance sub-sectors.

Flawed financial institutions: comprehensive solution with seven market-oriented disposals

"Defending and removing major financial risks" has long been the focus of supply-side structural reform. Baoshang Bank, Bank of Jinzhou and Hengfeng Bank, where substantial risks were exposed in the past two years, have implemented solutions based on their respective situations.

In the future, high-risk small and medium-sized institutions will continue to face two major tasks: defusing risk and deepening reform. On the one hand, seven kinds of market-oriented disposals will be used to defuse risk: disposal of non-performing assets (NPA), direct capital reorganization, inter-bank M&A, the creation of disposal funds, formation of bridge banks, introduction of new investors, and market exits. On the other, deeper reform will promote more standardized equity management and better corporate governance mechanisms.

Non-performing assets: Asset Management Companies (AMC) return to main business under tightened supervision

After several rounds of anti-corruption scrutiny, regulation of state-owned AMCs has become more stringent. First, they have been required to return to their main business of NPA disposal. Second, they are required to expand their provision of investment banking services for corporate restructurings, such as M&A, bridge financing and mezzanine investments. It is also worth noting that the recent rotation of executives between Huarong, Great Wall, and Cinda reveals a stronger approach to regulatory risk prevention, including avoiding long-term employment at a single institution, which can breed corruption, and deepening communication between executives.

Capital market: epidemic does not pose a long-term threat, direct financing continues to increase

In the past year, capital market reform has proceeded at a remarkable pace. Several reforms have enhanced capital market mechanisms and improved investment environment, including abolition of Qualified Foreign Institutional Investor (QFII) and RMB Qualified Foreign Institutional Investor (RQFII) quota restrictions, revision of Securities Law, and introduction of stock index options. On 3 February, the first day of trading after Spring Festival, Shanghai and Shenzhen stock markets plunged, but at the same time, foreign capital inflows exceeded RMB 10 billion, reflecting optimism of international financial markets and investors about China.

Meanwhile, measures in several areas are stimulating China's capital market development: 1) Long-term funds of bank and insurance institutions will gradually enter the market, converting some of people's traditional savings into long-term funds in the capital market, which will increase the proportion of direct financing. 2) Highly anticipated overall opening-up is around the corner. In 2020,  limits on foreign holdings in futures, funds and securities companies will be scrapped. As a result, more foreign wealth and asset management players will enter the Chinese market, benefiting the sector. 3) A pause in increases or even falls in housing prices will gradually shift the allocation of residents' assets from real estate to financial assets, bringing more long-term, stable assets to the market and optimizing its investor structure. In the medium and long term, China's capital market is expected to flourish.

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Technology

Online boosted by supply chain uncertainties

The coronavirus, as a "Black Swan" event, is casting a long shadow over the high-tech industry. Although there has been no material impact yet, we expect the electronics supply chain to be hit, because many multinational companies rely on electronics components manufactured in China. At the same time, we have observed that some sectors such as online gaming, streaming videos and online education, have benefitted from the outbreak as more people spend time indoors. The tech sector has also made positive contributions to fighting the crisis, utilizing the latest technologies including AI, 5G, big data and the cloud to predict the spread of the virus, diagnose patients, as well as support hospital digital infrastructure. Therefore, assuming the crisis can be contained, we expect the Chinese tech industry to grow by a modest 6%-7% in 2020.

Headwinds in smartphones, memory, display and 5G

With over 200 of Fortune 500 companies investing in the city, Wuhan is a key hub for global electronics manufacturing. Although factories there haven't been shut due to the coronavirus, it could cause serious disruption to the global supply chain.

For smartphone makers, Wuhan is a key producer of device components. If there are delays in the acquisition, production, assembly and testing of critical components, it will hinder the release of smartphones worldwide.

In the memory market, many leading manufactures are based in Wuhan and potential supply chain disruption will hamper market supply and prices.

Wuhan also has the largest display manufacturing clusters in China. LCD prices and production are almost certain to take a hit this year.

The rollout of 5G may also be impacted, as Wuhan is a critical supplier of optical components used in 5G networks.

We have yet to see impact on the Yangtze Delta and the Greater Bay Area, which also have many electronics hubs. But, if the coronavirus cannot be contained promptly, there will be spillover effects.

Indoor hours bolster online entertainment and education

Chinese consumers are spending an increasing amount of time online due to spending many hours indoors because of the coronavirus. Video games, online videos and online education sectors are among the major beneficiaries. More people, especially younger generations, are playing more video games than ever. At the same time, more people are spending time watching online videos due to temporary closure of movie theaters and shopping malls, and many recently-released movies being pulled from cinemas.

As well as entertainment, the epidemic has boosted the development of online education. With primary and secondary schools all delaying the start of term, online education platforms are the major way for students to study at home.

Technology helping the fight

The outbreak highlights the importance of data analytics and efficient information services when it comes to public emergencies. Electronic medical records, intelligent voice calls, enterprise cloud service platforms and prevention and control data systems all play important roles in helping to stop the coronavirus.

E-commerce is making the best use of smart logistics and digital technologies. In urgent circumstances, people can still rely on online platforms to order necessities and supply can be guaranteed. Healthcare apps are also gaining traction. People are attaching more importance to fitness. Related apps and online lectures are expanding in the market. Working from home is a trend now for many firms, which have launched platforms targeted at telecommuting.

Ultimately, firms should have better prepared management and strategies for crises. Digitalized management of employees and contingency plans should be established, and privacy of employee’s information should be protected. Meanwhile, the epidemic has also reminded enterprises of the importance of risk management, enabling themselves to identify major risks in advance and respond to them properly.

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Automotive

Temporary paralysis to dampen recovery 

As one of the pillars of the economy, the auto industry has been widely exposed to many risks arising from the coronavirus.

Car manufacturing supply shock due to restricted movement of people and goods

Like any other heavy-industry manufacturers, car companies find it hard to resume production due to restrictions on goods and public transportation.

First, most automakers aim to resume work before mid-February. But, given the uncertainty of some key issues—such as for how long and how widely the virus will spread—we suspect auto OEMs not to resume full-scale production until the end of Q1. A few OEMs have said they are considering suspending production or even slashing annual production plans. Knock-on effects will spread to tier-1 and subsidiary parts suppliers.

Second, the epidemic has paralyzed Hubei Province, and its capital city Wuhan in particular, which is home to many automakers and thousands of small and mid-sized parts manufacturers. With numerous parts suppliers in Hubei Province delaying production indefinitely, carmakers are facing a growing risk of supply chain disruption. So far the impact seems manageable as the auto industry has a quite resilient supply chain and OEMs are resorting to alternative solutions.

Third, dealerships are facing a particularly difficult time as most exhibition tours, offline sales, delivery and maintenance services are impeded by the nationwide lockdown. What’s worse, dealerships with higher inventory levels will have to bear additional costs including floorplan loan repayments, further squeezing their capital.

Pent-up demand in the short-term

The coronavirus has drawn comparison to the SARS outbreak in 2002-2003, which had a much higher fatality rate. When SARS was finally contained, Chinese consumers embarked on a car-buying binge, partly out of fear of taking public transport as it can easily carry and spread viruses. We doubt whether the coronavirus can create as much demand as SARS did in 2003 given differences in economic fundamentals and level of vehicle penetration.

Nevertheless, we still expect substantial pent-up demand to be released when the epidemic dies down. That said, small and mid-sized private companies and their employees will take a much heavier hit as they are more vulnerable to disruption to work plans and delayed production, threatening a large number of factories with going out of business, which would lead to declines in income and willingness to spend.

One silver lining to the epidemic, however, is the creation of new demand for in-vehicle health and wellness features as well as consumers' growing preference for online car shopping, on-demand car services and wireless updating of in-vehicle features.

As a whole, the spillover effects of the outbreak are expected to fade as late as the end of Q2, when the car market will pick up where it left off in 2019. Any growth in car sales will depend mainly on an economic recovery, income growth and restoration of confidence.

Taking the prolonged holiday and isolation due to the coronavirus into account, we lower our forecast for 2020 car sales to a decline of 3%-4%, from previous projection of a flat growth of the year.

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Life science and healthcare

Bucking the trend—from a one-off surging demand to task of improving system

2019-nCoV outbreak has brought critical challenges to the healthcare industry in medical product supply capability and the effectiveness of contagious disease defenses, but has also brought new development opportunities.

Short-term boost to sales of 2019-nCoV related products

Healthcare was not among the industries forced to extend the Chinese New Year break, as most medical products enterprises resume work on 3 February, albeit with flexible working arrangements. Extension of the holiday has had a limited impact on healthcare sector production and sales, although it might affect customer relationships due to the ban on sales representatives visiting healthcare professionals.  

A temporary boost to industry growth is arising from surging demand for 2019-nCoV related medical products, including:

• protection products: masks and protective clothing, etc.
• diagnostics products: diagnosis kits, PCR instruments and oximeters, etc.
• treatment drugs: Lopinavir/Ritonavir (Aluvia, a HIV drug) and interferon; glucocorticoid, albumin and human immunoglobulin for severely affected patients; traditional Chinese medicines including Xue Bi Jing Injections and Lianhua Qingwen Capsules, etc.
• other products: respirators and PSA oxygen concentrators, etc.

Judging from SARS, we expect this surge in demand to be followed by a reversion to normal or even below normal due to concave demand as the situation eases. This will create challenges for enterprises to expand production capacity and recruit staff after the epidemic. Issues around how to take advantage of growth opportunities and ensure a healthy transition after the epidemic will test enterprises' control of market changes.

The retail channel, especially online, is seeing rapid growth in cough and cold treatment and prevention products like vitamin C, Radix Isatidis Granules, Huo Xiang Zhengqi Tincture and ear thermometers. Under lockdown due to 2019-nCoV epidemic, more consumers are trying online channels and this trend of greater acceptance will continue after the outbreak eases.

That said, the more infected patients there are and the longer 2019-nCoV lasts, the higher probability that the coronavirus will mutate. If this happens and there is a surge in infected patients, the healthcare sector will face unprecedented challenges.

In the long run, the healthcare system will keep improving

2019-nCoV is the first nationwide epidemic since SARS in 2003. Government and the society are more experienced and better prepared this time, but an inflection point in the growth of confirmed and suspected cases is not yet in sight given the implementation of tough measures including city shutdowns and transport restrictions. We should realize China's public health system has room for improvement.

Government will systematically improve contagious disease prevention and control system after the epidemic, especially its early warning and standing prevention capabilities in tier-1 and tier-2 cities with high population density and mobile populations. Shanghai established the Public Health Clinical Center right after SARS to isolate and treat infected patients, and the site is playing a key role in controlling the expansion of 2019-nCoV in the city.  Similar infrastructure will be a basic requirement in top tier cities after the epidemic. This infrastructure, its related equipment and systems, will create large procurement demand at medical product enterprises.

Digitalization of healthcare systems will develop rapidly after 2019-nCoV eases. During the outbreak, iFlytek's AI diagnosis and follow-up assistant has helped community screening and suspected case diagnosis by primary healthcare professionals; an AI algorithm developed by Alibaba DAMO Academy has helped nucleic acid kit diagnosis; on-line medical consulting has been promoted by the Government for suspected flu patients with mild symptoms to help alleviate stress among healthcare professionals and avoid cross infection. The epidemic will promote full adoption of digitalization in the healthcare system, especially telemedicine in basic medicine. AI diagnosis assistants will be adopted, as will AI supported contagious disease prevention and control systems in CDC and exit-entry port administration, bringing new opportunities for related technology companies.

Multiple violent events targeting medical staff have aroused public concern of late, which, together with lengthy periods of highly intense workloads, relatively slow promotion and low compensation, are expected to lead to substantial improvements in salary and welfare system for medical staff in the short term. This is consistent with the direction of the healthcare reform, namely to reduce hospitals' medical product margins and increase healthcare service margins instead. Furthermore, encouraging healthcare professionals' vertical turnover within the public and private sectors can improve efficiency of the entire healthcare system. Finally, 2019-nCoV has also raised the bar for government officials who need to have deeper understanding of the medical system in order to manage it better. The medical system is set to develop under more professional supervision in future.

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Energy

Short-term oil demand hit, with limited long-term impact

The outbreak of 2019-nCoV has cast a shadow over China's economy and various sectors. In energy, concerns are centered on declining commodity demand and restricted supply due to extension of the Lunar New Year holiday. The outbreak has hit Q1 jet fuel and gasoline demand hard, dragging down short-term crude oil prices. In the electricity and coal segments, supply and demand will gradually get back on track after workers return to work.  

Oil product demand hit hardest, but no need to panic

The sharp decline in transportation activities has hit demand for jet fuel, gasoline and diesel quite hard and in turn put a brake on refining activities. Fear of a drastic commodity demand decline has skewed crude oil prices downwards sharply—WTI and Brent showed double-digit percentage drops in January (WTI -13.6 percent; Brent -15%). However, there is no need to panic.

Energy consulting company Wood Mackenzie forecasts that China's oil demand in Q1 2020 will be down by 450,000 barrels per day (bpd), a 3.5 percent drop from Q4 2019. OPEC and its allies are considering deepening crude supply curbs by an additional 500,000 bpd to 2.2 million bpd to stabilize oil prices. The impact of SARS was concentrated in the 3-6 months after it broke out. We expect oil demand to be curbed in the first half of 2020 and rebound in the second half of the year.

Figure: Oil demand also took a hit during SARS, but this only lasted one quarter

Impact on power sector still relatively muted

Extending the Spring Festival holiday weakened power demand and delayed some power plant construction projects. However, impact on the electricity sector is still relatively muted. We believe workers returning to their jobs will improve the situation. However, some power equipment manufacturers will be challenged by a shortage of workers due to the holiday extension or transport restrictions.

Coal market mired in stagnation

Weaker power demand and industrial activity inevitably impact domestic thermal coal production and consumption. Most coal mines are now closed, with sales and truck shipments on hold. They will not resume operations until late February as it is common for miners to work in cities away from home.

The energy sector is less exposed to the outbreak than tourism, transportation or retail. We believe the power and coal sectors will get back on track as people return to work. The timing of an uptick in oil demand will depend on how quickly the transportation sector recovers from current restrictions. It is difficult to predict how long it will take to control the outbreak, but containment is achievable and with continued efforts,  impact can be limited. Let’s stay positive.  

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Logistics

More logistical support needed during the epidemic

The logistics industry is being heavily influenced by the epidemic, and losses are inevitable

As the epidemic has developed, it has become apparent that logistics industry will be greatly affected in the short term. Although demand for logistical distribution continues to increase, given the current labour shortage and extent of people's isolation, distribution efficiency remains low. Hubei is  a transportation hub, and transport controls are in place across the province, which has created additional burdens for the national transportation network.

In 2019, the total value of China's social logistics is expected to have reached about RMB297 trillion. We expect its full year 2020 performance to be affected by the epidemic, with growth declining by 5-6 percentage points to about RMB290-300 trillion.

Although the epidemic is affecting the logistics sector now, we do not expect it to change its overall direction in 2020. Development will still focus on improving logistics transportation infrastructure, expanding the logistics services market, and improving logistics efficiency and innovation capabilities.

Surging express delivery volume as online retail demand increases

With online retail demand increasing and the need for epidemic prevention and control equipment, express distribution business volume has surged. During this Spring Festival from January 24 to 29, the postal industry collected 81.25 million parcels, an increase of 76.6 percent, and 78.17 million parcels were delivered, up 110.3 percent.

Until people are no longer isolated, express distribution demand will continue to rise. However, the flow of logistics staff back to work has not been smooth, and worker shortages have inevitably become a problem. At present, in addition to pressure from emergency supplies for epidemic prevention and control, nationwide distribution efficiency is still affected by delayed deliveries. That said, there are individual companies with strong distribution capabilities, such as China Post, SF and JD.

Intelligent and unmanned devices attracting attention amid security precautions

The epidemic has comprehensively changed how people live and behave, and contactless delivery has become more popular than ever. Intelligent devices such as automated storage systems, self-picking shelves, and automated conveying equipment are being widely used in warehousing and logistics systems. However, in the last mile of logistics, intelligent express cabinets cannot meet most people's needs. As technology advances, there will be more development opportunities for intelligent and unmanned devices.

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Retail

Pent-up demand in 2H of 2020

The consumer sector, including retail, catering and hospitality, has suffered amid the coronavirus outbreak. Impact of this epidemic on China's consumer market will exceed that of SARS in 2003. Back in 2003 during SARS outbreak, the contribution of China's final consumption expenditure to GDP growth was 35.4 percent, but it had risen to 57.8 percent by the end of 2019. Judging from the impact of SARS on total retail sales of social consumer goods in 2003, we conservatively estimate that year-on-year growth in total retail sales of social consumer goods will have dropped to 3 percent in the first quarter of 2020.

As the industry bearing the biggest impact, catering is struggling to survive. For example, Xibei Youmian Village, a brand affiliated with catering giant Xibei Group, has more than 400 stores in over 60 cities across the country. But almost all of its store business has now been suspended. According to Xibei's head, the company will have lost RMB700 million to RMB800 million this Chinese New Year, and it has only three months of cash flow reserves.

Tourism and hospitality industry, which relies heavily on seasonality, has also been greatly affected. It faces operating cost and cash flow pressure in rent and manpower, and some companies even face bankruptcy. Department stores and shopping malls are also suffering. Many of them have shortened business hours or delayed opening. Retailers including IKEA, Uniqlo and Wanda Plaza have closed all their bricks-and-mortar stores.

Meanwhile, several online consumption sectors are also being hit by coronavirus fears. For instance, online orders of catering goods and fresh food on local life service platforms have decreased. The capacity shortage in logistics has also impacted Chinese e-commerce business. On the one hand, due to nationwide travel restrictions, local communities have started to restrict the scope and timing of food or package deliveries. In addition, surging online shopping and service demand has hit online enterprises' supply chain management, inventory control, logistics and delivery.

Under heavy pressure, the consumer industry is enmeshed in a fight for survival. Department stores Wanda and China Resources, and other commercial real estate operators, have announced successive rent reductions for tenants; the catering industry has also tried to recover losses caused by the epidemic by increasing the proportion of online sales. In addition, several life service platforms, such as Meituan, have provided various assistance to merchants, including commission exemptions, annual fee extensions and free cash collection. In addition, state assistance policies will strive to give the consumer sector more breathing space in 2020. Governments across the country are encouraging large commercial buildings, shopping malls and market operators to reduce rents for small tenants during the epidemic, and have issued financial subsidies to leasing enterprises that take measures to reduce rents.

Given the current status of the outbreak, revenue of restaurants, hotels, and other major retailers will be significantly reduced in the first half of 2020, with supermarkets and convenience stores less affected. Moreover, as the peak H1 seasonal consumption period has now passed, and consumers are worried about economic prospects, it will be difficult for the consumer market to exceed its pre-epidemic level. Full-year growth of total retail sales of social consumer goods is expected to fall below 8 percent.

At the same time, value of various e-commerce and community life services has been highlighted during the epidemic. They play a critical role despite some deficiencies in supply chain, inventory and logistics. The proportion of online retail sales of physical goods in total retail sales of social consumer goods should continue to increase in 2020; meanwhile, growth rate of online retail sales of goods and services in 2020 is expected to exceed 20 percent. In addition, driven by advances in technology, unmanned distribution and food safety related products will be more widely used.

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