China flag
© Ufuk ZIVANA / 123RF Stock Photo

By Suzanne Yar Khan

China is looking to restart economic activity after a massive quarantine to contain areas affected by the Covid-19 virus, but debt levels could make for a tough rebound.

Listen to the full podcast on AdvisorToGo, powered by CIBC.

“In order to contain COVID-19, China has had to quarantine large portions of its population,” said Peter Hardy, senior client portfolio manager of global value strategies at American Century Investments in Kansas City, Missouri.

“This has also coincided with the Lunar New Year. In China, you typically see a falloff in economic activity around [the] Lunar New Year, but economic activity has remained at depressed levels due to the quarantine.”

The number of new cases of the Covid-19 virus in China has declined. The World Health Organization’s China representative told Bloomberg TV Monday that “at least one peak” has passed, while warning the country needs to remain vigilant.

Hardy, who manages the Renaissance U.S. Equity Income Fund, said that data for coal and electricity usage show the extent of China’s economic slowdown. “Basically, everything is ground to a halt,” he said.

With previous virus outbreaks, like SARS and MERS, there was a short-term falloff in economic activity followed by a bounce once the situation was contained, he said in a Feb. 20 interview.

Covid-19 will ultimately be contained, he said, but the impacts may be different. This includes the sheer number of people affected, as well as measures used to contain the outbreak.

Further, “economic activity may not rebound as aggressively as [after] other outbreaks due to the current high levels of debt in China,” Hardy said.

“The bounce-back isn’t necessarily a given,” he added.

Household and general government debt were at all-time highs in China at the end of Q3 2019, at 55% of GDP, according to the Institute of International Finance (IIF). Overall Chinese debt at the end of the third quarter was almost 310% of GDP.

“Companies in China have a month or two of cash on hand, and may not be able to meet their debt obligations if the quarantine and resulting economic weakness were to persist,” Hardy said.

“Companies could go out of business, loan losses in China could accelerate, and pressures on China’s economic situation could increase.”

He said several companies have already issued revenue and earnings warnings.

Hardy also pointed to the human toll of the virus, which sometimes gets lost in market news. More than 80,000 Chinese have been infected with Covid-19 and more than 3,000 have died.

“It’s important that we first discuss the human consequence of what is occurring and how heartbreaking it really is,” he said.

This article is part of the AdvisorToGo program, powered by CIBC. It was written without input from the sponsor.