Over the past couple of weeks, market expectations have gradually been freed from the association of coronavirus exclusively with China, however, successfully replacing it with the theme of a global pandemic. In light of weakening of market attention to China and the release of the February manufacturing / non-manufacturing PMIs, which, by the way, have painted severe depression, it is interesting to look at some alternative high-frequency indicators of economic activity in China to understand whether there are early signals or signs of economic recovery (= optimism). In addition to rumored coordinated response of the world Central Banks, signals of recovery of the second largest economy, in my opinion, is a necessary component of stable positive market mood.

Here is a brief recap of what happened with the February activity in China's production / services sector:

Production PMI: 35.7 points with a forecast of 45.0 points;

Non-production PMI: 29.7 points with a forecast of 50.0 points.

Bearing in mind that China has been easing restrictions throughout the country, the rate of recovery in production should shed light on whether there is any significant long-term damage (hysteresis) or the downturn in economic activity is mostly a fallout of lockdowns and can be followed with something like V-shaped recovery. To gauge the effect of easing lockdowns on production recovery trend official government figures may be way too lagging: as Goldman argues, we can use more “frequent” data such as coal burning, railway coal loading volumes, traffic congestion or passenger intercity transportation volumes as closely correlated variables. Below are four charts for those indicators.

Coal burning for electricity production:

Picture1-1.png

Coal loading volumes for rail transportation:

Picture2.png

Volumes of intercity passenger traffic:

Picture3.png

Traffic congestion index:

Picture4.png

All four metrics show rather muted response to relaxed lockdowns touted by Chinese government which clearly suggests there is a hysteresis effect and it may be significant. This is a big risk not only for local but also for foreign firms which are probably forced to put off production plans. There are even rumors circulating that the Chinese authorities ordered to increase electricity generation and leave the lights on in the factories so that satellite China images can not be used as a proxy of production resumption trend which is probably a key to understanding the prospects of global recovery.

To recap: the high-frequent data discussed above combined with stock markets leap suggests protracted China slowdown may not be fully priced in, the risk of a downward revision of Chinese GDP for the first quarter is rising. Concerns about sustainability of recent market rebound seems absolutely justified.

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