Is China leading the way?

With a shorter lockdown and faster reopening, are there lessons to be learnt from China or is their roadmap to recovery questionable? Alex Duffy, Portfolio Manager for the Fidelity Global Emerging Markets Fund gives his thoughts on where he thinks China is headed.

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China, despite being the sort of epicentre of the pandemic initially is obviously, had a relatively shorter period of lockdown and a faster reopening. I think there are a few things that drove that, which are not necessarily fully transferable to other economies, simply because of the way in which the government was able to affect a rapid and a very aggressive lockdown. I'm not sure that mandate exists in other markets to the same degree. So the ability of other economies to follow that exact roadmap is potentially more questionable. I do think, however, particularly from a developed market perspective, the infrastructure they have with respect to testing, knowledge testing, ability to identify localised cases, there's a lot of learning that can be taken globally.

I would caution the view that the Chinese domestic economy is back to kind of full steam. I think that the Chinese equity market and the Asian equity markets sold off in the initial part of this crisis, because there was a concern, a supply shock. The factories were closed, there's no output, it's a supply shock. What does that mean for the equity market as a consequence of that? That phase is past, okay? Now we're dealing with a global demand shock, where demand for those markets that Asia, North Asia exports to, Europe, the US predominantly. Those markets have been closed. It's led to a collapse of export demand from Asia.

Now as those markets start to reopen, yes, the Chinese factories are back online, but whether they've got customers that supply is another question. And whether actually when those customers re-emerged, they still demand product at the same rate that they demanded it at the back end of 2019 remains to be seen. Now, I'm currently based in London, we've seen a collapse of consumption initially, because we were under a lockdown environment. That has now changed as we start to reopen. But whether we get back to a hundred percent of the levels that we are at prior to the lock down, I think it's unlikely. And so the level of aggregate demand that China is going to face on the export side remains to be seen, and is a note of caution that I would make around the Chinese equity market and the Asian equity market in particular.

Now on the flip side of that, you do have the ability to fiscally stimulate the domestic economy. This goes back to the earlier point around regionalization and the size of the domestic economy. The ability of China as a country from a governmental level, but also from a pent-up demand perspective to create demand through stimulus, and create a retooling of their economy to offset this export weakness with domestic demand is something which does put them in a better position than some other markets. And it's certainly something that I think we will see fan out globally as economies start to reopen. You will see a greater emphasis on fiscal spend, initially in the form of support, but then more proactively around demand creation on a forward looking basis. And so I think they will be some of the key learnings.

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