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China’s economic recovery – too good to be true?

China's economic recovery speeding up
Some normality in Wuhan, China, October 2020 (Source: Keitma/Shutterstock.com)

Asia’s growth engine China is leading the way of economic rebound even as other countries struggle to recover from the pandemic. China’s economy expanded at its fastest pace on record in 1Q21, despite prolonged lockdowns and a nationwide economic lull. After record growth in the first quarter, China’s economic recovery has continued in April.

The Chinese economy continued its pandemic bounce back, with a GDP figure of 18.3% for the first quarter of 2021. This was following a 6.5% growth in the fourth quarter last year, amid containment efforts and vaccinations ramp up. Analysts suggest strong exports and rising business confidence are expected to support China’s economic recovery.

The quarter-on-quarter growth in China has demonstrated a steady recovery. In addition, the second-largest economy in the world is the only major economy to report growth in 2020, with a full-year GDP expansion of 2.3%.

Amid strong industrial output and export demand, the Chinese government has set a 2021 annual economic growth target above 6%. China’s industrial output grew 35.1% in January and February compared to the same months last year.

Asian Development Bank (ADB) projected China’s GDP growth target at 8.1% this year, compared to 6% decided last month. It added, “Recovery will be driven by improvement in the job market, restored consumer confidence, and release of pent-up household demand”. The year-on-year GDP growth rate is projected to be 5.5% in 2022.

How China’s economy recovered from Covid-19 pandemic

China’s economic recovery is in stark contrast to its economic condition during April 2020. The country where the virus initially originated in late 2019, was struggling to recover and reopen after a lockdown. China’s industrial productivity saw a serious decline due to the lockdown during Q1 and Q2 of 2020.

But, the country took early travel restrictions and vaccination measures that led to a different recovery path from other countries. The government took several various stimulus measures like the issuance of special treasury bonds, lower lending rates, and tax exemptions for China’s economic recovery.

“China has normalized faster than expected, aided by an effective pandemic-control strategy, strong policy measures, and buoyant exports,” World Bank had said.

As per data compiled by Standard Chartered Plc, confidence among small and medium-sized enterprises, or SMEs, picked up for a second month. The services sector grew at a faster pace, driven by the transport and logistics, IT, and commercial services industries.

China’s economy expands at a faster rate than before coronavirus, why?

China’s economic recovery demonstrates a sharp turnaround from the historic contraction caused by the coronavirus outbreak. Profits at larger industrial firms rose 72% in the first two months, against the same period two years ago. The urban unemployment rate ticked down slightly to 5.3% in March 2021, slightly down from 5.5% in February 2021. The unemployment rate had risen to 6.2% in February 2020, when China’s factories were in pandemic lockdown.

However, comparisons to the first quarter of last year are not a useful guide to the coming quarters, said Andy Rothman, Investment Strategist from Matthews Asia in a report. The fantastical 1Q21 GDP growth rate of 18.3% was such a large increase, partly due to the weak base figures, he wrote. China’s GDP fell 6.8% YoY in the same quarter last year, amid the pandemic-led lockdown.

China remains global trade titan

The sudden export push amid the 2020 global economic turmoil from the coronavirus pandemic has led to a swift economic recovery in China. One of the biggest markets in the APAC region, China-led export resilience played a keystone role in the global economic rebound. China’s share of global exports hit an all-time high of almost 15% in 2020, driving global economic growth.

The country’s reliance on overseas markets and technology has made it the global leader, despite its long-lasting tariffs and political tensions with Washington. Total manufactured goods imported into the U.S. from China returned to a record high of 22% last year.

Even after the pandemic-led economic pressure, China’s exports rose in 2020 by 3.6% to $2.6 trillion, an improvement over 2019’s 0.5% gain.

Industry analysts expect China’s merchandise exports to outperform imports in 2021. China’s trade recovery was impressive in Q1 2021, with exports surging by almost 50% YoY, to about $710 billion.

Chinese economy turns increasingly about domestic demand

China’s economic recovery has continued to the Q1 of 2021, backed not only by strong export demand but also by the pickup in domestic demand. China is maturing to be more reliant on domestic rather than foreign demand. Chinese consumers are heavily influenced by the local market.

China has fostered domestic consumption through advances in technology. Factory output and consumer spending are on the rebound this year. The country’s growth momentum stayed resilient with domestic consumer spending bouncing back, as vaccines were rolled out across the nation.

In March, China’s consumer prices index rose 0.4% compared with minus 0.2% in February. This was led by due to a jump in fuel prices, of nearly 12% from a year-earlier period. Meanwhile, prices paid by manufacturers rose 4.4% YoY, climbing at the fastest pace in over four years. Consumer prices rose led by the removal of restrictive measures and vaccine rollout in the country.

With private consumption lagging given rising unemployment, Chinese President Xi Jinping lobbed the idea of a ‘dual circulation’ strategy‘ (DCS). The two-pronged development strategy seeks to spur China’s domestic demand in addition to catering to export markets.

Can China’s economic recovery continue?

As China’s economy leads the world’s recovery from the pandemic, some suggest its rebound is leveling off. Not all sectors of its economy have recovered. Economists suggest worries over job losses, unsatisfactory labor market conditions, uneven growth across the country, elevated levels of household and corporate debt will keep the economic rebound under check in China.

Over the next years, the Chinese government will have to continue to rebalance its economy and push out long-term reforms. The debate on whether China’s economic recovery lasts in the near future remains open. Observers say the growth drivers could change in the months ahead.

Further, total virus cases and vaccine distribution in China will also lead the economy’s stance in the future. Currently, the country has officially reported 4,636 coronavirus deaths and more than 90,642 confirmed cases.

Credit Suisse recently downgraded China from overweight to market weight saying its most exciting recovery period is over. The rating agency added, “China has limited potential for future GDP gains, negative EPS momentum relative to the region, late-cycle valuations, and the region’s biggest potential payback from pandemic related current account windfalls.” J.P. Morgan economists also lowered their full-year growth forecast to 9.3% from 9.5%.

The strength of China’s economic recovery also remains uncertain as trade frictions as ties with the US and other trading partners continue to deteriorate. Moreover, major economic regulators also might partly raise interest rates, depending on the global economic growth and demand. Amid rising inflation, China’s economic recovery also hinges on the policy tightening by its central bank.