China’s imposition of a strict quarantine in response to the COVID-19 pandemic plunged its economy into a deep contraction in the first quarter of 2020, -6.8% year-over-year, its first negative GDP print in over 40 years. The contraction in output was generalized across the economy (meeting one definition of a recession).

China gradually began to reopen its economy starting in late February, with that month proving to be the bottom of its activity (compared to the month of April for most other economies outside of North Asia). Over the past four months, China’s data has continued to improve, aided by a further reopening of the economy, only small and localized increases in new cases and targeted monetary and fiscal support. As a result, China reported positive growth in its second quarter GDP of 3.2% year-over-year. With this result, China’s nominal GDP level is now a bit higher than where it ended in 2019 – one of the only examples of a V-shaped recovery taking place globally.

While China’s economy as a whole is healing, there are some differences beneath the surface. Particularly strong growth is seen in manufacturing and construction, whereas consumption has been slower to recover as confidence still weighs on households. This difference was reflected in the June data, with industrial production growing 4.8% year-over-year, while retail sales improved but were still down -1.8%. In addition, while China’s domestic demand is improving with imports rising 2.7% year-over-year, external demand is still weak with export growth of a more muted 0.5%. 

But, can we trust that China’s recession is really over? Digging into the imports data is always helpful to confirm the trend. Indeed, China’s import volumes of industrial commodities have surged, with copper imports rising 50% month-over-month. Copper prices have recently been on a tear, rising 1% year-over-year in June and 10% so far in July, a two year high. Some supply restrictions may be playing a part, but since China is responsible for more than half the world’s consumption of copper, an increase in the metal’s prices has traditionally been a good confirmation of a pick-up in Chinese manufacturing and infrastructure activity. Going forward, it will be important for household consumption to continue to gradually improve as well.  

As a result of its continuing recovery, Chinese equities have been one of the top performing equity markets this year, rising over 10% so far this month and 12% year-to-date (behind only the NASDAQ). Some of the more recent short-term moves have been fueled by retail investors’ speculation, but China’s improving fundamentals have also led to inflows from institutional and foreign investors. As China continues its recovery, Chinese equities remain one of the most attractive opportunities in the COVID world – and beyond.

Rising copper prices confirm a substantial pick-up in Chinese mfg. activity

Source: FactSet, NBS, J.P. Morgan Asset Management. Data are as of 7/16/20.

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