China, the first country to experience a Covid-19 outbreak, faced significant human and economic costs, especially in the first quarter of 2020. However, the extension of the Lunar New Year holiday, travel restrictions, and lockdowns have helped curtail the impact of the virus on the China economy even as it eventually became a global pandemic.

China Economy Overview

In order to mitigate the economic impact of the Covid-19 crisis, policymakers offered financial relief and fiscal support to companies. They protected the financial market stability by providing liquidity to the banking system. According to the International Monetary Fund (IMF), macroeconomic and fiscal policies helped boost China’s economic recovery.

China’s gross domestic product (GDP) contracted by as much as 6.8% year on year during the first quarter of 2020 but was able to recover and grow by 3.2%, 4.9%, and 6.5% in the next quarters, bringing the overall GDP growth for the year to 2.3% year on year.

While real GDP was able to grow to 1.94 times its 2010 level, it could not reach the Chinese Communist Party’s goal of doubling its size.

The IMF is cutting its growth forecast for the China economy in 2021 from 8.2% to 7.9% due to domestic financial risks and the US’ recent move to block Chinese firms from accessing key technology. The latest restrictions on fundraising via Hong Kong for Chinese companies also played a factor in the downgrade.

According to the IMF, the worsening US relations could potentially cause a 1.8% decline in China’s real GDP over the long term while the US may suffer a 1.1% decrease.

The IMF also mentioned that restrictions on financial flows through Hong Kong could also adversely impact the economy, as it comprises around one-third of China’s total equity financing, two-thirds of offshore bond issuance, and 60% of inward and outward direct investment.

Meanwhile, the average unemployment rate in urban areas remained stable at 5.6%, which is lower than what was projected, indicating a recovery to the pre-pandemic level.

Currency and Central Bank

The Chinese currency is officially named Renminbi, which means “people’s currency,” in Chinese, but is more commonly known worldwide as the yuan. China’s inflation rate declined from 1.7% in September to 0.5% in October 2020. It even reached -0.5% in November before settling to 0.2% in December 2020. This may be attributed to the recent stabilization of food price inflation after previously staying high due to the lingering effects of the African swine fever and heavy rains and floods in the summer.

Producer price inflation has gradually increased alongside the country’s economic recovery but remained in a deflationary territory at -2.1%.

To dampen the impact of the pandemic, China’s central bank, the People’s Bank of China (PBOC), decided to expand its re-lending facilities to provide targeted support to producers of medical supplies and daily necessities as well as micro-, small- and medium-sized enterprises (MSMEs).

The PBOC has also lowered various policy interest rates, particularly by 30 basis points for the 7- and 14-day short-term reverse repo rates and another 30 basis points for a 1-year medium-term lending facility (MLF) to reduce loan interest rates especially to businesses.

However, some banks’ ability to provide new financing to the private sector was hampered by the slow adjustment of deposit rates and capital shortages in smaller banks.

Industry and Trade

China’s early recovery from the Covid-19 pandemic allowed it to resume work faster, leading to a ramp-up in industrial production, contributing to the demand for its factory goods, including medical equipment and electronics. China posted a record-high trade surplus, resulting in a 3.6% growth in exports.

Furthermore, the growth of China’s consumer market seems unstoppable. While retail sales of consumer goods fell by 3.9% as spending behavior was affected by pandemic control measures, this decline was actually cushioned by a 10.9% year on year surge in online retail sales.

Experts expect China’s total consumer spending to return to pre-Covid levels this year. More precisely, China Internet Watch projects an average annual growth rate of 7.3% from 2021 to 2024.

According to the latest consumer insights report of private equity firm L Catterton, it is the Generation Z, born between 1996 and 2010, who is driving consumer spending in China. Even though half of this group is still in school, it accounts for 25% of total expenditure on new brands. The report furthermore highlights that China’s capital market has also doubled down on consumer brands, making it one of the few sectors to see an increase in activity in 2020.

Despite the trade conflict with the United States, China achieved a major success in international trade in 2020 by signing the Regional Comprehensive Economic Partnership agreement (RCEP). The pact with 14 Asia-Pacific states comprises 2.2 billion people and about one third of the world’s economic output.

Survey and Rankings

China has significantly improved its ranking in the World Bank’s Ease of Doing Business ratings from 46th in 2018 to 31st in 2020. In terms of economic freedom, the Heritage Foundation ranked the China economy at 100th among 180 countries worldwide. China received a score of 58.4, which is below the global average of 60.8 and fell under the “mostly unfree” category.

Stock Exchanges and Capital Markets

Investing in Chinese stocks was historically off-limits to foreign investors, but the market has slowly opened up as the government continued to loosen regulatory requirements.

China has two stock exchanges, the Shanghai Stock Exchange (SSE) and the Shenzhen Stock Exchange (SZSE). In these exchanges, companies incorporated in the country may issue A-shares, B-shares, and H-shares.

Onshore A-shares and B-shares were previously restricted from foreign investors, but the Chinese government has launched various programs to allow them to participate in the onshore market.

Foreign investors looking to invest in Chinese stocks may do so through an exchange-traded fund (ETF) tracking one of the major indices, such as the SSE Composite Index and the SZSE Component Index. They may also use an actively managed mutual fund.

Bond Market

China’s domestic bond market is the second largest in the world, worth over $12 trillion. Since 2016, when the market was opened to foreign investors, interest in China’s onshore bond market has steadily increased. Foreign holdings of onshore bonds now exceed $400 billion and Cambridge Associates (CA) expects it to rise further as Chinese bonds are added to major global fixed income indexes.

“We think the market warrants further attention from global investors, given Chinese bonds continue to offer higher yields and lower correlations than those found in other major bond markets, with the potential to bring portfolio diversification benefits”, a recent report by CA states.

Real Estate Market

China’s real estate market has steadily grown alongside the country’s economic progress.

Demand in the market has been boosted by urbanization, as approximately 415 million new residents settled in China’s cities between 2000 and 2020. United Nations (UN) estimates show that around 208 million more will settle by 2040.

Additionally, per capita income in China is rising, giving Chinese residents higher purchasing power. In 2020, it was around 4,900 USD – more than twice as high as in 2010. Higher per capita income, in addition to government programs such as public welfare fund loans, are prompting more people to enter the real estate market.

IMF estimates also indicate that 24% of the housing stock in China’s cities are without private kitchens/bathroom facilities. More than a third dates from pre-1990, suggesting a need for Chinese buyers to upgrade to better homes.

The National Bureau of Statistics (NBS) reported that average new home prices in 70 major Chinese cities have increased by 3.8% year-on-year in December, falling slightly from a 4% increase in November.