China expects a further recovery in Q2 despite external headwinds

SINGAPORE (ICIS)–China is expecting a sustained recovery in the second quarter despite headwinds from plunging external demand.

Major economic indicators improved substantially in March, indicating the country’s recovery has gained a firmer footing, and the country’s economic performance will improve further in the second quarter, which is a fundamental trend, Mao Shengyong, a spokesman for the National Bureau of Statistics (NBS) said at a news conference on 17 April.

Decelerating year-on-year declines in investment, retail sales and industrial value-added data in March suggests that a recovery is underway, Oxford Economics said in a note on 17 April.

“We expect this recovery to continue and to show up in GDP in the second-quarter onwards as more progress is made towards return to economic normalcy,” Oxford Economics said.

Work resumption in the country’s manufacturing sector has been increasing rapidly, according to China’s Ministry of Industry and Information Technology (MIIT), China’s top industrial regulator.

As of 21 April, 99.1% of China’s major industrial enterprises have resumed production, and 95.1% of employees have returned to work, and the corresponding rate in Hubei province was 98.2% and 92.2%, respectively, MIIT spokesman Huang Libin said at a news conference in Beijing on 23 April.

China’s energy consumption, which is regarded as a key indicator for economic growth, is also demonstrating continuous recovery in April.

The thermal coal consumption of China’s six major coastal power generation groups averaged at 548,480 tonnes per day in the first half of April.

This represents an increase of 7.8% from March and 45.4% from February, but still a decline of 17.65% from the same period of 2019, according to data from the China Coal Trade & Development Ltd, a China coal market tracker.

As a barometer of the recovery in oil consumption, the gasoline and gasoil inventories of Shandong independent refiners have been declining continuously to reach a generally normal level of over 6m tonnes as of 16 April, from an 8-year high level of 13.64m tonnes seen on 13 February, according to ICIS data.

Gasoil, gasoline  inventories of Shandong independents   (Unit: ‘000 tonnes)

ICIS data also shows that Shandong independent refiners boosted their average operating rate to almost 74% as of 23 April, which more than doubled the level in mid-February, and the highest level since mid-November 2019.

Operating rate of Shandong independent refiners

However, shrinking external demand will be a big challenge for China’s foreign trade sector this year.

Sources from some export-oriented Chinese major refiners said the global pandemic had heavily affected their export of oil products in April and they are pessimistic about foreign sales in the several months ahead.

Chinese refiners plans to export about 2.5m tonnes of gasoline and gasoil in April, a significant  decrease of 32% from March and also a decline of 21% from a year before, according to ICIS data.

A Sinopec export-oriented refinery even slashed its jet fuel exports for April by 75% from the previous month.

Nevertheless, domestic consumption and infrastructure investment are expected to become major drivers to a sustaining economic rebound for the rest of the year.

Expanding domestic demand is essential to maintain a steady trend of the Chinese economy, NBS’s Mao Shengyong said in the news conference.

In order to boost domestic consumption, a number of Chinese cities, such as Wenzhou, Ningbo, Zhengzhou, Ji’nan, Wuhan, and some cities in Guangdong have launched to offer consumption vouchers to general public since late March.

In terms of infrastructure investment, the MIIT will speed up the construction of new infrastructure in the fields of 5G network, internet of things, mega data, artificial intelligence and smart cities.

It will accelerate the construction of key projects in the industrial and communications sectors, and follow up on the landing of key foreign-funded projects, the MIIT official Xu Kemin said on 16 April at another news conference.

The MIIT forecasts that China will deploy more than 600,000 5G base stations by the end of 2020. The acceleration of “new infrastructure” will effectively expand investment and also boost employment.

China has contained the spread of the COVID-19 at home and has been well managing the risk of imported cases by end April, which creates favourable conditions for the overall recovery.

So far, it remains unclear whether the government will still set a GDP growth target for 2020.

The country’s GDP growth target is usually announced during the annual sessions of the National Congress held in March every year, which have been postponed with no new dates announced yet.

The International Monetary Fund (IMF) forecasts China’s growth is projected to decelerate to 1.2% in 2020 and rebound to a strong recovery of 9.2% in 2021.

Additional contribution by Angie Chen

Analysis by Yu Yunfeng