Businesses across the Greater Bay Area are confident of an improving environment in the third quarter, according to research from Standard Chartered and the Hong Kong Trade Development Council.
The inaugural Standard Chartered GBA Business Confidence Index (GBAI) is a forward-looking quarterly survey that looks at the business sentiment and synergistic effects across cities and industries in the Guangdong-Hong Kong-Macao Greater Bay Area (GBA). The index suggests that respondents expect an evident easing of contractionary pressure in Q3 after a challenging Q2 due to Covid-19 disruptions.
According to the survey, the GBAI’s ‘current performance’ index for business activity stood at 37.0 for Q2-2020, below the neutral line of 50. This reflects the impact of a Covid-related global recession on the export-oriented region. However, the ‘expectations index’ stood at a much better 47.0, suggesting an expectation of a broad-based improvement in Q3 versus Q2. In particular, the ‘new orders’ sub-index stood above the neutral 50 mark, reflecting an optimistic view about the new orders in Q3. Although the GBAI current performance index for credit was at 45.3, the sub-components indicate lower borrowing costs from both banks and non-bank financial institutions as well as improvement in banks’ attitude towards lending.
Kelvin Lau, Senior Economist, Greater China, Standard Chartered said: “The survey result indicates that companies in the Greater Bay Area expect a better Q3, likely a reflection of the continued normalisation of activity within China, boosted by aggressive monetary and fiscal policy easing. This pick-up is driven by domestic more than external demand, matching the general perception that China is the first country to begin recovering from Covid-19.”
The GBAI also includes industry and city sub-indices: by industry, ‘innovation and technology’ is expected to improve the fastest, followed by ‘financial services’; by city, Guangzhou and Shenzhen are seen to lead the way in the post-Covid rebound, while Hong Kong is seen to lag. Among companies that plan to expand to other GBA cities, Shenzhen, Zhuhai and Hong Kong are the top preferred destinations.
“Shenzhen proved the most resilient in Q2 and is expected to return to economic expansion in Q3 along with Guangzhou. These cities’ encouraging performance may be because these finance- and technology-centred cities provide a base for larger companies with greater sustainability and more cash flow,” Lau added. “For intra-GBA expansion, Shenzhen and Hong Kong are favourable because they are well-established core cities with high spending power, and Zhuhai is the closest city to Macao and well connected to Hong Kong via the Hong Kong-Zhuhai-Macao Bridge.”
Looking at the report in more detail, key findings include a relatively strong recovery in Q3, while lingering excess capacity shows the continuing impact of the virus outbreak.
Better Q3 expected
The performance indicators for Q2 were broadly weak, with the GBIA performance indicator for business activity at 37. By contrast, the GBAI expectations index for business activity stood at a much better 47.0, though still below the neutral 50 mark. A further breakdown shows that respondents expect a broad-based improvement in Q3 versus Q2, likely boosted by a combination of a lifting of lockdowns and travel bans within China, the clearing of order backlogs once factories re-open, and aggressive monetary and fiscal policy easing. In particular, the ‘new orders’ sub-index improved the most among all eight expectations sub-indices, compared to their corresponding ‘current performance’ prints. By comparison, ‘new export orders’ rose by a lesser extent, suggesting domestic demand may play a bigger role than external demand in driving a GBA rebound.
Lingering excess capacity
In our ad-hoc survey questions, we asked respondents about their operational levels now versus normal levels in view of Covid-19 disruptions. While a majority (63%) reported a 91-100% employee return rate, capacity utilisation and new orders are taking longer to return to pre COVID norms. 56% reported 70% or less capacity utilisation, and 60% reported new orders at 70% or less of pre-COVID levels. This implies room for improvement, although we do not see these gaps closing completely in the near term as long as external demand remains weak.