How the Chinese economy bounced back so quickly
China was the first country to be struck by the coronavirus pandemic. Its economy was also the first casualty, with output contracting by almost 10 per cent in the first quarter of 2020 as the entire province of Hubei was locked down and many of China’s largest cities also shut down much activity.
But China now seems, on the face of it, to be the first economy to recover too. The latest official data released yesterday showed an impressive 11.5 per cent expansion in the second quarter of the year, above what most analysts had been expecting. The level of total activity in China is now higher than it was going
From this perspective the coronavirus nightmare is disappearing into the rear view mirror for the world’s second largest economy – and it’s back to business as usual.
So how did China do it? Could western countries learn anything from the example? And is this impression of an economy that has emerged successfully from the crisis actually correct?
How did China do it?
The first thing to note is that there have long been concerns about the veracity of the official Chinese figures and there is not reason to believe that they have suddenly improved so the picture may not be accurate.
That said, there is also no reason to believe the statistics have become any more inaccurate this year.
If one accepts the data as presenting a reasonably accurate picture it’s clear most of the bounce back was driven by industry and construction rather than household consumption.
Total credit and loans of various kinds also rose strongly in the quarter, showing how this activity was funded.
This suggests that the recovery was heavily driven by stimulus measures enacted by central and local governments.
China’s exports also held up surprisingly well in the second quarter, despite the global trade slump, with Chinese firms apparently growing their market share.
Louis Kuijs, an analyst at Oxford Economics, believes this might be partly due to Chinese companies nimbly shifting operations to scale up exports of goods in high global demand such as personal protective equipment.
Could the west do the same?
It’s important to recognise that the Chinese economy is still structurally very different from western economies.
China’s services sector is considerably smaller than Europe’s or America’s.
And despite the great migration of Chinese workers from the countryside into giant cities like Beijing, Wuhan and Shanghai in recent decades around 40 per cent of the Chinese population is still rural.
Household consumption in China is below 40 per cent compared to between 50 and 70 per cent in the west.
China’s economy and financial system is also much more state-directed than any in the west, with a heavy reliance on infrastructure investment, funded by state-owned banks, to drive growth since the financial crisis a decade ago.
All this means that any kind of economic policy adopted in China, even if it seemed successful, would be far from assured to work in a western context.
Is China’s recovery all it seems?
China entered this pandemic in something of an economic crisis.
GDP growth for the full year of 2019 had fallen to 6.2 per cent, the weakest seen in almost 30 years.
And the country’s demographic profile was ageing fast, raising fears that China would “grow old before it grew rich”. into the crisis.
There was a powerful sense that the growth model of debt-funded infrastructure investment had run out of steam and was in danger of creating a domestic financial crisis.
The official policy of Beijing was to slow down infrastructure investment and encourage household consumption to take over as a dominant source of spending. There was also a concerted drive to push China into high value-added production and cutting-edge innovation. But the trade war waged by Donald Trump was threatening this aspiration.
It does appear that the Chinese authorities’ containment of the virus domestically has been relatively effective so far. And it has managed to dig itself out of the deep economic hole of earlier in the year.
Yet the investment-powered recovery has done nothing to further the necessary rebalancing of the Chinese economy. Areas likes retail sales and hospitality did not surge in the second quarter. Consumption remains below where it was earlier in the year and will need to rebound strongly in the second half of 2020 if the overall recovery is to be sustained.
And those immense Chinese structural economic challenges remain. Indeed, they are likely to be exacerbated if western markets and investment are cut off in the coming years as hostility and suspicion towards the increasingly authoritarian Beijing regime continue to grow.