China Has the V-Shaped Recovery of Which Trump Can Only Dream
But the structure of its comeback may create problems at home—and abroad.
This month, China released its third-quarter economic indicators, including a GDP growth rate of 4.9 percent. The figures confirmed that the country is on track for an economic recovery after the first wave of the COVID-19 pandemic. For the whole of 2020, the IMF forecasts, China’s GDP will grow by nearly 2 percent—much lower than last year’s 6.1 percent but healthier than the 4 to 8 percent declines expected for the U.S. and eurozone economies. In fact, China is the only major economy that can expect GDP growth at all this year.
Although U.S. President Donald Trump has been touting a V-shaped recovery for the United States, especially after quarterly economic data released this week indicated the start of a rebound after sharp declines, it is China whose economy is actually beginning to climb the hill. The question is how sustainable the growth is, and what it will mean for the global economy.
China’s V-shaped recovery is mostly coming from accelerating industrial production and robust export growth. To a lesser extent, more modest but sustained growth in infrastructure investment and housing construction has also played a role. In contrast, the West’s nascent recovery has been driven more by household consumption financed by government social programs. That is, the United States is channeling funds directly and indirectly to individual households through unemployment insurance and through support for specific industries such as airlines and restaurants in an effort to protect jobs. Europe also has comprehensive national programs to sustain employment and income levels. As a result, retail sales, for example, in the United States and Europe have rebounded back to pre-pandemic levels while China has still a ways to go.
In the absence of similar large-scale government social programs, China’s consumption growth has been lagging, improving from negative 6 percent year-on-year in the second quarter to negative 1 percent in the third quarter, as reported by the government. Households spending less is not surprising; China’s unemployment insurance and welfare programs have cushioned those working in government and medium- to large-scale enterprises, but tens of millions of migrant workers lack formal protection and many have been forced to return to their home provinces to find temporary employment.
At the same time, China’s draconian handling of the pandemic facilitated a sharper industrial supply response. Its manufacturing sector is now back to full capacity, while industrial output in the United States and Europe is still significantly below end-2019 levels as firms grapple with ongoing disease outbreaks. China also benefited, at least initially, from strong demand in the United States and Europe for COVID-19 related products such as surgical masks and ventilators. Over the summer, that demand shifted to electronics and communication equipment for households operating under lockdowns. Finally, in recent months, demand has risen for a broader range of industrial products that other countries have been unable to fulfill because of pandemic related disruptions. According to Chinese government statistics, since late spring, monthly export growth rates have ranged from 15 to 40 percent for medical supplies, electronics, and home furnishings. That boom in exports helped drive industrial value-added growth to nearly 7 percent in September.
At the same time, Chinese demand for imports has been tepid, thanks to depressed household consumption. That means China’s current account surplus (the inverse of other countries’ trade deficits with China) will likely be more than double last year. This is mirrored in the sharp appreciation of the renminbi to the U.S. dollar by 7 percent since May.
And that begs a few questions: Will China’s recovery—based on industrial expansion and larger trade surpluses—exacerbate economic tensions with the United States? Will the pandemic experience reinforce or discourage sentiments to restructure supply chains that were already under stress because of the U.S.-Chinese trade war? And will China be able to sustain a relatively high growth rate for the medium-term once the pandemic is brought under control globally?
Regardless of the outcome of the U.S. presidential elections, the structure of China’s economic recovery will aggravate ongoing trade war tensions, even if its success was not the result of an attempt to harm the West but was a consequence of Beijing’s well-coordinated steps to control the pandemic and restart its manufacturing sector. But with its success will come retribution. Accounting principles tell us that with soaring U.S. government budgetary deficits and increased borrowing among households, the U.S. trade deficit will rise over the next few years. That fact will sustain the blame game and intensify sentiments that Beijing’s state-run economy is taking advantage of the pandemic to advance its economic interests.
At the same time, the pandemic has made a trade war and the restructuring of supply chains away from China more difficult. The pandemic was initially seen as yet another reason to reduce dependency on China—in this case for essential medical supplies on top of the goods that were the target of the tariffs levied by the White House last year. But China’s export surge has now extended well beyond pandemic-related items to a much broader range of products. Any shift of supply chains out of China will now by necessity be more gradual than previous plans. As analyzed by the consulting firm, Gavekal: “China has a wide and deep pool of labor, excellent infrastructure, dense networks of suppliers, and an effective government that coordinates well with business,” making it very difficult to relocate production elsewhere. Possible alternatives like Vietnam or India, either lack the size or ecosystem to duplicate China’s capacity to assemble and ship rapidly manufactures to global markets.
An American Chamber of Commerce survey of U.S. companies in China conducted in May found that in the midst of the pandemic, just 2 percent of respondents were considering leaving the Chinese market in the next 3-5 years, and a mere 4 percent were considering relocating some or all manufacturing out of China. Depending on the outcome of the U.S. presidential election next week, that could change. But even if political pressure means some regionalization of supply networks, continued investments into China are likely to be the norm rather than the exception for the medium term.
In the long term, though, China’s recovery has not eliminated the uncertainties surrounding its longer-term growth prospects. Growth has been slowing steadily for the past decade, and the country’s economic prospects have been dampened further by the trade and technology war with the United States. Beijing has attempted a course correction with a new so-called dual circulation growth strategy which party media pronounce as “a new development pattern in which domestic and foreign markets boost each other, with the domestic market as the mainstay.” The forthcoming 14th Five-Year Plan, to be endorsed at the end-October meeting of the Party’s Central Committee, is expected to crystallize this policy and will prescribe a multitude of programs and initiatives. New rhetoric aside, most of them are likely to be a continuation of past policies, such as freeing rural land for developments, liberalizing labor migration policies and promoting more investments in hi-tech industries.
But strategies that worked well when growth was in the double digits a decade ago need to be reconsidered when that growth has hit the single digits. Today, the concern is not about producing more, be it laptops or highways, but about being more productive: making more with the same amount of investment. Indeed, the returns on China’s overall investments have been declining steadily and are now half of what they were a decade ago. Unless reforms are taken to improve the efficacy of public investments or the performance of state-owned enterprises, for example, China’s growth rate will continue to decline over the coming years—and more rapidly than before if the U.S. and China do decouple.