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untune that string and hark

It’s well worth reading the Raymond James “Coronavirus Impact Call – Key Takeaways & Call Notes”

Please find below the transcript. A straight copypaste of brokerage gear isn’t something IKN normally does, but considering the depth of analysis on display compared to the utter crap we have to suffer in 99% of media channels, it’s happening today. As they say round here, “más vale pedir perdón que pedir permiso”.
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The Coronavirus Crisis: Economic Impact in China and the Region, Government Response, and What to Expect Next
Hosted by Pavel Molchanov, Tavis McCourt, and Ed Mills
 
Featuring:
Amy Celico, Head of China Practice at
Albright Stonebridge Group (ASG) and formerly a senior official at
Commerce and State departments. ASG is a Washington-based global
strategic advisory firm that is co-chaired by former Secretary of State
Madeleine Albright and former Secretary of Commerce
Carlos Gutierrez.
 
Headline Takeaways:
·        
This remains priority #1 for the Chinese govt. The
main issue is the amount of conflicting information regarding incubation
period (could now be as long as 17-24 days), testing kits (seeing false
negatives), and what the true
numbers are (patients physically unable to see doctors, tempering
official numbers).
·        
Amy believes that while the Chinese govt may have
been slow to initially respond (and faced harsh criticism for it), they
are now cooperating as much as possible and have allowed a committee of
WHO experts into China to assist
with the outbreak. Numbers may not be entirely accurate due to patients
being turned away/unknown cases, but likely not due to lack of effort
from the govt.
·        
For an outbreak timeline, Amy believes that late-Feb/early March is likely an optimistic scenario to see a peak in the disease.
This is mainly due to the widespread confusion around the true
nature/characteristics
of coronavirus and the longer-than-expected incubation period, adding
additional risk. Global risk remains to be seen but the general stance
is overwhelming caution.
·        
From an economic perspective in China, part of the
challenge is each local govt/region is taking a different approach to
the issue, restarting factories and other industries on a case-by-case
basis. For now, mainly “essential”
personnel are back at work, with a focus on getting much needed food
and medical supplies into the city.
·        
On ports & the import/export situation,
companies have been reporting that is increasingly difficult to get
goods into China. This should ease somewhat as the CNY holiday has
ended, but it will again likely be on a port-by-port
basis. This is a challenge for China as travel within the country is
bogged down, meaning if the regional port is not open it can be very
difficult to receive supplies.
·        
As for the most impacted industries, it really
depends on regional impact. The auto industry is one we have heard some
challenges around and there is concern regarding factories having proper
ventilation to return to work. Additionally,
consumer spending will remain challenged on a broad-based level. Demand
for e-commerce is overloading the system as no one wants to leave their
home and there aren’t enough willing delivery people.
·        
From this, the optimistic scenario for a “back-to-normal” economic environment would be April.
This implies that should this escalate any further, this could dampen
economic activity for a majority of 2020. As reported
by news outlets, China is looking to stimulate the economy, but many of
the measures are short-term in nature (injecting liquidity, providing
financing, etc.) and an extended outbreak would pose questions on if
China could support the economy longer-term.
·        
From a trade-war standpoint, there is some
additional urgency in implementing Phase-One reforms and we have seen
China reduce tariffs on US imports. However, we feel getting Phase 2
negotiations going will be a significant challenge
due to travel restrictions, all hands on deck for coronavirus, and
continued tensions between the US and China (ex. China angry at the US
for banning travel and inciting further fears around the virus.
 
 
Call Notes:
Opening remarks: Disease outbreak is still not under control and is priority #1 for the Chinese government.
 
  • Chinese economists are
    predicting that GDP growth will drop this Q to around 4%, but could be
    worse. This will hit the annual rate bringing it between 5-5.4% for
    2020. The longer-term impact remains uncertain
    as it appears to have yet peaked in China.
  • Today
    marks the first day that China is to officially return to work
    following the Chinese New Year holiday, but this will likely be a
    stunted process due to travel restrictions and other logistical issues.
    This will make ramping up difficult along with the local approvals
    needed to restart certain types of work in China.
  • With
    900+ deaths from this, it has surpassed SARS and is now being viewed as
    more significant. Over 40,000 confirmed cases of the disease are
    reported with the majority of these in Hubei province, with
    6,500 in critical condition.
  • However,
    the proportion of patients who have been cured has been rising, up to
    8.2% from 1.3% when polled on Jan 27th. The fatality rate of coronavirus
    is lower than it was with SARS, but authorities are
    still struggling to confirm what is actually transmitting this virus,
    spurring this outbreak.
  • There
    are conflicting researcher reports of what methods it transmits by, how
    long until symptoms show, etc. and with this uncertainty, we think an
    optimistic timeline is for this to peak in late February.
  • This
    will cause on-going disruption in China but any predictions are
    extremely difficult until we actually see this peak in the virus and
    have some sightline to containment.
  • People are viewing this
    virus as a “potential Chernobyl like event” in terms of public impact
    and there are growing levels of unrest. The death of the doctor who
    initially tried to flag this disease caused
    considerable public outcry in China, despite attempts at silencing
    this.
  • This outbreak will be a major test of the Chinese government’s ability to govern and control this situation.
  • For example, each local
    government is taking their approach very differently on a one-off basis
    and plenty of factories have still not resumed, have changed what they
    are producing, or are not producing
    at regular levels.
  • Other
    things we are watching this week: WHO will have an expert group
    arriving to monitor the situation and aid the Chinese government.
    American doctors have been invited to be a part of this group.
  • Also
    have the Chairman of the Federal Reserve testifying to Congress this
    week and he will certainly speak on the impact of the coronavirus on the
    global economy.
Question – how reliable is the data
and the numbers you threw out? Anything in China is not an exact
science, how much confidence do you place on these?
  • The govt is acutely aware of
    the dangers of under-reporting, which is why you’ve started seeing the
    number of cases and even fatalities jumping – trying to reduce citizen
    concern around the “true numbers”.
  • Part
    of the concern with determining the true number of those affected is
    for one, many patients simply aren’t able to get access to doctors so
    they cannot be tested, despite showing symptoms. Additionally,
    other patients are being told to go home unless they are deathly ill to
    make room.
  • Further to
    that, a lot of the testing equipment used is providing false negatives
    and this leaves some uncertainties as well. So overall, many predict
    there is a much higher rate of infection but it may
    not be fair to blame the Chinese government in this specific case,
    apart from the initial delay on reporting on the disease.
Mentioned in a few jurisdictions the
restrictions on factories have already been loosened, yet others remain
under complete metro area quarantines. So for the authorities to lift
the restrictions in a more concerted way, what do they need
to see before pulling the trigger on that?
  • Think local govts are
    struggling with this, some “essential” personnel were asked to return to
    work but it’s a challenge where factory conditions are not ready (ex.
    Not enough ventilation) or simply not
    having employees finished their mandatory 14-day quarantine after
    travelling for CNY.
  • Some
    are being asked to work remotely where applicable, but some industries
    such as auto have been quite disrupted and supply chains are looking for
    ways to adapt and function outside of China.
  • While local govt
    desperately need the revenue, they are very concerned and are taking a
    very conservative stance on this despite the impact on the economy
On this late-Feb/early-March
timetable, assuming that’s true for the moment, is that when we’d see a
more widespread relaxation of regulatory constraints?
  • When you look at the incident rate, while we thought a few days ago it was slowing, it actually has not.
  • The
    fact that the govt is saying “we want people to get tested” rather than
    simply staying  home is telling. An early-feb peak doesn’t seem
    possible any longer, in our view.
  • What
    that would mean for a return to normalization in the economy, that
    means April to us. Need to see efforts to contain this, make sure things
    are truly slowing down, and April in our view is actually
    the earliest for normality.
  • Think it’s a matter of time before more events and forums are postponed and March should be out the window.
 
We can assume there are fewer exports
out of China right now, but how backed up is the import situation in
your mind? And on factory activity, are there any industries where
activity where it should come back first/be most impacted?
  • On an anecdotal basis, we
    have continued to hear that it is challenging to get product into China
    because there simply weren’t workers there to unload ships. However,
    that is one of the activities we believe
    is resuming today as govt wants to make sure there is access to food,
    medical supplies, necessities, etc.
  • Don’t
    think we’ll see a resurgence in retail, restaurants, etc. but the govt
    wants to make sure citizens can go to the grocery store and get what
    they need.
  • On areas more
    impacted, it’s tough to pinpoint but generally the geographic areas
    with higher incident rates are more affected – so pinpointing those
    regions & relevant industries is probably a good guide.
Following the trade-war dynamic, how
do you see that impacting the Phase-One deal and does this speed up any
further negotiations as they see some pain?
  • On Phase-One, both govts
    continue to say they are working as much as they can to get parts of the
    agreement to go forward – saw China reduced some of the tariffs
    already.
  • However, the
    practical reality of negotiating further on Phase 2 will be challenged
    as “all hands are on deck” for coronavirus, along with elevated tensions
    between the two that still remain on various issues.
  • A lot of China’s ire
    seems to be pointed at the US for closing its borders, raising alarm,
    and not offering more aid to suffering Chinese citizens. We don’t feel
    that claim is accurate and there have been
    global relief efforts, including help from the US but they had a bit of
    a “tiff” last week, which is another example of the deep-seeded
    tensions.
  • Overall, we feel this
    will be a problem getting Phase 2 negotiations off the ground. Prior to
    the outbreak Chinese officials were supposed to be in the US in Feb, but
    there is no potential for travel now
    and US officials were actually evacuated from Beijing, making it harder
    to be discussing.
Missed the full question – Believe it’s “what steps is the govt taking to in regards to the economy?”
  • On the policy moves, have
    been open about stimulus and supporting the economy but on another
    front, they have come out and said they are looking to crackdown on the
    illegal wildlife trade to prevent more
    outbreaks like this.
  • There
    is additional liquidity being pumped in, tax-breaks incoming, further
    easing, etc. which will all help but are relatively short-term measures.
    However, if this continues to drag on and we have a peak
    later than expected, what could China do to meaningfully stabilize the
    economy/market in that type of scenario… hard to say.
 
Seen international flights cancelled
and other restrictions from other govts, any sense what these countries
need to see before resuming normal travel conditions with China?
  • Will probably be guided by
    what the Chinese govt is actually releasing in terms of how the disease
    is spreading/being contained in Feb, but there is an overwhelming
    attempt to be quite conservative here.
  • Diff govts are taking
    different approaches and don’t see anyone being too excited to restart
    flights until at least post-Feb. The threat right now is as people
    return to their homes post-CNY, is there a
    risk that this further accelerates with the additional migration of
    people.
  • The WHO arriving
    in China this week is a good sign but some feel this is simply the tip
    of the iceberg that we haven’t woken up to yet. Think the WHO has been a
    bit slow to be critical of China and haven’t
    pushed enough to get access there… so we hope they can now better
    advise the airlines and other countries being on the inside.
  • Additionally,
    companies are now further reducing travel not even to China, but to
    other international events (ex. MobileWorld in Barcelona) after someone
    spread the virus from Singapore to Europe, and these
    flight bans might accelerate even on an individual corporate level.
Second dimension of this is ports, any
sense how many are re-opening and how the govt might prioritize which
ports and which goods?
  • Chinese govt put together a
    special channel to expedite medical supplies and anything on that front.
    The second tier focus will be on food stuffs as mentioned, but we do
    not have a sense of which specific
    ports are being prioritized as one of the continued challenges is once
    things enter one city, there are still so many restrictions on movement
    within China.
  • This
    argues for more ports being re-opened to get goods to those local areas
    as it will be hard to flow things through a couple main areas due to
    these restrictions.
Do we get to a point where warm
weather works in our favour and helps spur a decline and additionally,
how do you see the opportunity for e-commerce? Is there one or is there
too much disruption to delivery?
  • Can’t answer the first question, not sure warmer weather has any impact.
  • On
    e-comm, they are being somewhat overwhelmed right now as people rely on
    these but there haven’t been enough people willing to provide delivery
    services yet.  As people return and spend their time in
    quarantine, we should see a resumption in e-comm sales as there will
    likely be an on-going view of needed to reduce contact.
  • For example, people did not want to ride the subways in Beijing today on the first day back to work.
Question on stimulus, have we seen
anything so far or are we likely to see anything in terms of consumer
stimulus as they lose out on potential income?
  • Will be tough, the immediate
    impact of the virus was consumers simply weren’t spending, saw a huge
    impact on the Chinese box office for example. Gross sales were ~$2m on
    CNY weekend this year vs. $360m
    last year.
  • International
    food retail is closing chains, local Chinese cos. are closing, and it’s
    difficult to see where consumers will want to go out and spend money in
    this environment and liquidity will be crunched.
  • China
    is still trying to stabilize its economy from its end-2019 issues and
    coronavirus is just putting them back in the whole, making things
    exponentially more challenging.
Saw two global reports that incubation
periods can be 17-24 days, is that longer than normal and is it built
into your predictions previously stated?
  • Info like this is
    contributing to why late-Feb/early-March is now an optimistic timeline
    in our view. The Chinese govt is still lacking some basic information
    about the disease and the main challenge with
    this particular strain.
  • It’s
    defying health authority abilities to really nail down the incubation
    period, testing for it, and more. Chinese citizens are clamoring for
    this information as they want to protect themselves and truly
    be in the clear.
 

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