The prolonged Sino-U.S. trade friction took a bite out of China’s economy last year. However, things looked better for the world’s second-biggest economy going into 2020 with the de-escalation in the trade war after the signing of the “phase one” deal, a rebound in China’s manufacturing toward the end of 2019 and Beijing’s fiscal stimulus. But then the emergence of coronavirus wreaked havoc.
The outbreak, which has been now labelled a pandemic by the World Health Organization (WHO), has so far claimed more than 4,700 lives and infected more than 1,28,000 people globally. At least 115 countries are currently in the deadly grip of this virus. Per WHO, it is the first pandemic caused by a coronavirus.
After originating in China, the virus has been spreading rapidly across the globe lately with Italy, Iran and South Korea being the most affected. In fact, Italy and Iran have emerged as new hotspots for coronavirus. Moreover, outbreaks in France, Germany and Spain have worsened over the past several days.
Coronavirus Rattles China’s Economy
Coronavirus has crippled China’s manufacturing and service sectors, as indicated by recent data points. China’s manufacturing sector, which bore the brunt of trade war for most part of 2019, was dealt another blow.
The country’s factory activity slumped to a record low in February, thanks to the outbreak. The official manufacturing purchasing managers’ index (PMI) tumbled to 35.7 for the month from 50.0 in January. The country’s services sector also spiraled down to all-time low in February amid the outbreak. The Caixin/Markit services PMI dropped to 26.5 in February from 51.8 in January as new orders fell sharply and demand contracted due to the virus crisis. A reading lower than 50 indicates contraction in activity.
Manufacturing activities in China were disrupted by shutdowns imposed by Chinese authorities. Factories in China are struggling to resume full operations due to shortage of workers resulting from virus-induced travel restrictions and disrupted supply chains and logistics.
Notably, China’s economy saw the weakest growth in almost three decades at 6.1% in 2019 amid the tariff war with the United States, lower than 6.6% recorded in 2018. China, a major source of demand for a vast spectrum of products, has emerged as a global growth engine over the past few decades. The sputtering engine of China’s economy weighed on the world economy last year.
The International Monetary Fund (IMF) recently trimmed its growth forecast for China for this year to below 5.6% due to the outbreak. Last month, it had predicted coronavirus to lower China's economic growth to 5.6%, 0.4 percentage point lower than its January outlook.
The contagion has also slowed down activities in the construction space in China as workers who returned from the Lunar New Year holidays were being quarantined. The country’s automobile sector is also getting hammered by the pandemic. New car sales in China tumbled 80% last month, per China Passenger Car Association, as the coronavirus-induced panic impeded new purchases.
Fading New Cases in China Give Glimmer of Hope
The virus outbreak appears to be subsiding in China as new cases tapering off over the past several days. China’s government has taken draconian measures to contain the contagion through lockdowns and quarantines on the worst-hit areas, including the city of Wuhan in Hubei province, the epicenter of the outbreak. While the virus is fast-spreading globally, extreme containment measures imposed by Beijing has resulted in a slowdown in the outbreak.
Certain major industries in Wuhan were reportedly asked to resume work this week after President Xi Jinping’s first visit to the coronavirus-ravaged city of Wuhan since the commencement of the outbreak. Notably, new cases in Hubei, which account for roughly two-third of global cases, has significantly reduced to as low as single digits lately.
While new cases are gradually fading, there have been reports on an increasing number of recoveries from the virus infection. As of now, more than 68,000 people have recovered in mainland China, nearly 85% of the total confirmed cases. While the crisis is not over for China yet, it is surely receding day by day. China’s top health commission recently said that the country has passed the peak of the outbreak.
Moreover, Xi Jinping earlier said that although the outbreak is the country’s "largest public health emergency" since the founding of the People's Republic in 1949, it will only have a short-term impact on the economy. Beijing has pledged a volley of stimulus measures to counter the economic fallout from the pandemic. Measures already being implemented by Chinese authorities include interest rate cuts and financial injections worth billions of yuan, with more expected to come. Beijing is reportedly planning to pump up the economy with big infrastructure spending.
Although the outbreak is likely to have a shattering effect on China’s first-quarter GDP growth, government stimulus measures are expected to cushion the coronavirus-hit economy and usher in a better second quarter.
5 China Stocks Worth a Wager Now
With China now in recovery mode from the lethal contagion, the time may be ripe to pick some China stocks with strong fundamentals.
We highlight the following five China stocks, with a solid Zacks rank, that are worth considering for investment right now. Our research shows that stocks with a Zacks Rank #1 (Strong Buy) or 2 (Buy) offer good investment opportunities. You can see the complete list of today’s Zacks #1 Rank stocks here.
Daqo New Energy Corp. (DQ - Free Report) : This leading producer of high-purity polysilicon currently sports a Zacks Rank #1. The Zacks Consensus Estimate for its current-year earnings has gone up 6.4% in the last 60 days. The company also has an expected earnings growth rate of 326.7% for 2020. Moreover, it has an estimated long-term earnings growth rate of 29%.
Vipshop Holdings Limited (VIPS - Free Report) : The leading online discount retailer for brands in China has a Zacks Rank #1. It has an expected earnings growth rate of 17.9% for the current year. Over the last 60 days, the Zacks Consensus Estimate for its current-year earnings has gone up 3.3%. The company also delivered positive earnings surprises in each of the trailing four quarters, the average positive surprise being 32.5%.
Tencent Holdings Limited (TCEHY - Free Report) : The Internet services giant carries a Zacks Rank #2 and has an expected earnings growth rate of 25.5% for this year. Over the last 60 days, the Zacks Consensus Estimate for its 2020 earnings has moved 0.6% north. The company also has an estimated long-term earnings growth rate of 21%.
China Distance Education Holdings Limited (DL - Free Report) : This leading provider of online education in China, carrying a Zacks Rank #2, has an expected earnings growth rate of 41.3% for the current fiscal year. Over the last 60 days, the Zacks Consensus Estimate for its current-fiscal earnings has advanced 1.1%. The company also has an estimated long-term earnings growth rate of 21%.
NetEase, Inc. (NTES - Free Report) : The Internet technology company, carrying a Zacks Rank #2, has an expected earnings growth rate of 7.6% for 2020. The Zacks Consensus Estimate for its current-year earnings has advanced 1.9% over the past 60 days. The company also delivered positive earnings surprises in each of the trailing four quarters, the average positive surprise being 147.8%.
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