In a world mired in recession, China manages a V-shaped recovery
Its rebound is also starting to look a little more balanced, with consumption again on the rise
Officials reported that the economy expanded by 4.9% in the third quarter compared with a year earlier, just shy of its pre-pandemic pace. Whereas most other countries are mired in recession and grappling with a new wave of covid-19 cases, China has just about completed the upward leg of a V-shaped rebound. Analytically, its success is easy to explain. China got one crucial thing right: by almost stamping out the virus, it was able to allow the activity to resume with few restrictions. Schools are fully open, factories are humming and restaurants are buzzing. Moreover, China is lucky in one crucial way: it is better insulated from weak global demand than smaller peers such as New Zealand that have also done a good job of containing the pandemic. Until vaccines are rolled out, others will struggle to match China’s feat.
Yet China’s headline resilience has masked an unbalanced recovery. Back in February, when the government began to cautiously relax its lockdown, it focused on reopening factories and launching new infrastructure projects. It is easier, it correctly reasoned, to maintain strict health protocols in factories and on construction sites, which can be managed as semi-closed environments, than in shopping malls or schools. On top of that, China’s meager provisions for unemployment insurance meant that the millions of people who found themselves out of work had to cut back on spending. The result was that, early in its recovery, China’s economy was fuelled by industrial production and investment spending. Capital formation—the category in GDP accounting that encompasses these endeavors—contributed five percentage points to growth in the second quarter, whereas consumption subtracted more than two percentage points, leaving China with a 3.2% year-on-year growth rate.
The latest data, covering the third quarter, reflect a more balanced if still imperfect, recovery (see chart 1). The contribution from capital formation fell to less than three percentage points, in line with the pre-pandemic norm, as spending on infrastructure tailed off. Consumption added nearly two percentage points to the headline growth rate. That was below its pre-pandemic heights but a big improvement—easily noticeable in the crowds that have returned to tourist sites, restaurants, and shops. Trade, meanwhile, was the cream on top. Although shipments have slowed overall, China’s share of global merchandise exports has risen to a record high during the pandemic. It received a boost by being the first big manufacturing power fully to resume operations, in addition to being the world’s biggest producer of protective equipment from masks to surgical gowns.
Whenever China’s data look so rosy, it is natural for skeptics to ask whether they are actually credible. In newly published research, Capital Economics, a consultancy, and economists from the Federal Reserve, America’s central bank, have demonstrated that Chinese growth figures since at least 2013 have indeed been abnormally smooth (see chart 2). But in crunching the latest numbers, they both conclude that the current rebound is big and real. The party-goers in Wuhan would concur.