Economics China Economic Perspectives: CFOs' take on COVID-19 impact

The negative impact of trade war &  tech restrictions has persisted. CFOs are more worried about geopolitical risks & US-China tensions; about half of all respondents see US-China relationship as a key external risk factor.

28 Oct 2020

CFO expectations for future trade/tech restrictions are less optimistic

Source: UBS Evidence Lab (> Access Dataset) All respondents

This column chart illustrates the responses to a CFO survey about future trade and tech restrictions.

The latest CFO survey showed improving business activities 

The 7th UBS Evidence Lab China C-Suite B2B Survey was conducted between 18th-29th September 2020 with 518 senior executives. The survey results suggest business operations have been recovering from the Covid-19 hit, and corporate outlooks are improving. However, the levels of operation for most businesses are not yet back to pre-Covid-19 levels. In response to the Covid-19 shock, many firms chose to delay or cut capex spending, and more respondents than the March survey have also cut wages. The findings are consistent with our view that consumption and corporate capex may take longer to recover to their normal pace of growth.

US-China tension remained a key headwind

Three  quarters  of  the  manufacturing  exporters  reported  negative  impact  from  trade  war  and  73%  reported a  hit  from  tech  restrictions.  Not  surprisingly,  about  half  of  all  respondents rank US-China relationship as a top external risk. Expectations of trade war have also become less optimistic with more CFOs now expecting no roll-off of tariffs or even  further  escalation  than  before.  Our current  baseline  forecast  assumes  no  change  in  US  policy  on  China  regardless  of  the  upcoming  election  outcome,  even  though  a  Biden administration (if elected) may choose a more multilateral approach.

Policy has been supportive but is expected to tighten

Thanks  to  the  monetary  and  credit  easing  in  H1,  2/3  of  the  firms  saw  relaxed  credit  conditions  although  not  a  drop  in  credit  costs.  Firms  have  also  reported  a  somewhat  lower  tax  and  fee  burden,  thanks  to  the  tax  and  fee  cuts  earlier  this  year.  Looking  ahead,  as  the  economy  continues  to  recover,  more  respondents  than  before  expect  tighter  access  to  credit  and  rising  credit  costs.  Respondents  also  expect  tax  and  social  security  contribution  to  increase  as  many  tax/fee  cuts  are  scheduled  to  expire  by  end-2020. At  the  macro  level,  we  think  policy  easing  has  already  peaked  though credit growth may peak in October or November.

Covid-19 increased the desire for supply chain shifts

71%  of  the  manufacturing  exporters  plan  to  move  or  continue  to  move  some  production out of mainland China, higher than 60% in April and 57% last year. 45% of respondents said Covid-19 increased their intention to move despite China's success in containing the virus. Meanwhile, 30% of respondents have moved or plan to move some  production  overseas  back  to  China,  and  another  54%  said  they  may  consider  such a move in the future. These findings are consistent with our view that supply chain shifts will be accelerated by Covid-19, and that the moves will be in both directions, as China's  large  and  growing  market  and  further  opening  up  should  attract  more  investment.  In  the  short-term,  the  finding  is  consistent  with  our  view  of  a  depressed  manufacturing capex outlook.

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