China Finds Its Footing

China could keep key industries strong and avoid a recession.

Back in 2008, the global financial crisis turned the world’s attention toward China as the major market of last resort for commodities and consumer goods. While European and US demand wobbled, China stood strong with help from government infrastructure spending and private investment, rooted in a cultural penchant for saving money.

China again stands out today, but for different reasons. China was the first economy forced into lockdown, after the Covid-19 pandemic began to build in the east-central city of Wuhan in January. Since then, like major markets everywhere, the world’s second-largest economy has been struggling to find its footing—and seems unlikely to once again ride to the world’s rescue.

That said, the Chinese economy is showing surprising signs of resilience. The pandemic has been less deadly and better controlled in China than in many of its export markets, according to official statistics. China’s consumer retail sector appears to be bouncing back, now that most of the country has emerged from weeks of sheltering at home. Department stores report robust traffic to accommodate pent-up demand. The world’s largest auto market saw passenger and commercial vehicle sales climb 14.5% year-on-year through May to more than 2.1 million units, the China Association of Automobile Manufacturers said.

Electronics has also been strong, thanks in part to a surge in teleworking and home-based businesses. The government reported in May a 10% increase in retail sales of laptops, printers and related gear, which it attributed to a domestic shift to home offices.

China’s bellwether real estate market is reportedly strengthening, particularly in big cities such as Shenzhen. Another bright spot is the healthcare supply sector as pandemic-critical protective products made in China literally fly out of the nation’s factories aboard cargo planes bound for overseas buyers.

Beijing’s other challenge is to kick-start consumer spending. The government is finding ways to encourage ecommerce platforms such as Alibaba as a way to promote small businesses as well as domestic consumer demand. Despite the lockdown having frozen much of the country’s economy for weeks—including many ecommerce businesses—the National Bureau of Statistics said from January to March were 2,216.9 billion yuan ($316 billion). But the market share for online sellers (versus bricks-and-mortar stores) grew 5.4%, to 26% of the nation’s retail sector, the bureau says. While exports have been badly stung by the global economic collapse, China has taken steps to bolster foreign-trade related businesses, which employ nearly 200 million people nationwide, by intensifying promotion and further development of its free-trade zones in the Wuhan area and on the southern island of Hainan, including the simplification of investment procedures.

The economy “is gradually recovering,” says Vincent Chan, China strategist at investment advisory firm Aletheia Capital in Hong Kong. “Most notably, investment spending in infrastructure and the property sector are progressing very well, mainly due to strong government support for infrastructure construction and to decent property sales in major cities. Export growth is also better than expected despite weak global growth, probably due to the surge in medical-related supplies.”

However, China’s prospects for near- and long-term growth are closely tied to questions about the pandemic’s future effects worldwide. “China could experience negative growth in 2020,” says Andrew Collier, China country analyst at GlobalSource Partners.

While the country has restarted its economy relatively quickly after a very sharp, draconian lockdown, there’s concern about a possible new wave of infections, as underscored by a fresh lockdown in Beijing in mid-June that the government linked to seafood from Europe.

“Continued cases, most recently in Beijing, mean that the opening up could be problematic,” Collier says. Chan cautions that the recent “consumption growth pickup is still uncertain, with the risk of a second round of virus outbreak. Industrial capital expenditure is very weak, considering the weak business environment.”

Trade Tensions, Debt Headaches

Economic prospects are also clouded by trade tensions with the US that predate the pandemic and have been exacerbated by the policies of US President Donald Trump’s administration. While negotiations with Washington on a new trade agreement continue, the Chinese government is acknowledging the cool climate. In an extraordinary move in late May, the usually confident government abandoned its longstanding practice of announcing an annual GDP growth target for the year.

In his speech to the National People’s Congress on May 22, Premier Li Keqiang explained, “This is because our country will face some factors that are difficult to predict in its development due to the great uncertainty regarding the Covid-19 pandemic and the world economic and trade environment.”

Li said the government is shifting focus in hopes of “stabilizing employment and ensuring living standards.”

Collier calls abandoning growth targets “understandable,” as Chinese policymakers “do not know the full extent of the downturn that will be caused by the trade war, slowing global growth in general and the virus in particular.”

China’s debt issues are another major concern. “There is significant deleveraging,” Collier says, “particularly in the corporate sector, whose debt will increase in the low double digits, bringing nonfinancial corporate debt to around 290%. There is also a significant move to increase borrowing by local governments to invest in infrastructure: a move back to the 2009 stimulus playbook. These factors will boost short-term growth at the expense of efficiency.”

In a recent analysis, Societe Generale Group Chief Economist Michala Marcussen notes that when China “became a source of demand of last resort” following the 2008 global economic crisis, it came “at the cost of higher debt to the tune of 100% of GDP,” adding, “It seems unlikely, however, that China today can offer a replay of this situation.”

In line with Li’s call for stability, the government is earmarking funds for tax cuts, local government support and small-business bailouts. At a State Council executive meeting on June 9, the premier announced a tax-break package for businesses worth 2.5 trillion renminbi ($356.9 billion), of which RMB1.6 trillion will be in the form of cuts to workers’ social security taxes.

Beijing is also pushing local governments to help export-oriented companies explore new business options at home, says Bai Ming, deputy director of the Ministry of Commerce’s International Market Research Institute, who is often quoted by state media. The goal is to steer exporters toward “the huge potential of the domestic market to help foreign trade enterprises overcome difficulties is a unique advantage of the Chinese market,” he told the Daily Economic News.

The People’s Bank of China has shaped recent monetary policy moves to support small businesses as well. A recent report by UBS Securities’ China Equity Strategy team says the bank “remains cautious in further stepping up monetary policy easing.” Yet as summer drags on, the analysts say they “expect the PBC to appropriately step up liquidity injections to maintain stable liquidity in the banking system.”

The bottom line for many close observers: The economy has weakened but may avoid recession. As the lockdown was easing in April, Aletheia Capital’s Chan notes, “The International Monetary Fund forecast real economic growth for China at around 1.2% in 2020, and there is a good chance it can be achieved.”

“This is significantly weaker than the 6% growth in 2019,” says Chan, “but considering the huge negative impact on growth from the coronavirus globally, this is not a bad result.”

Another telling data point is employment. Workers started returning to factories and desks with social distancing and face masks in April; the government reported urban unemployment fell in May from the previous month by 0.1% to 5.9%.

In Chan’s view, “China will do better than most countries in the world in the near term, and it is probably one of a few countries in the world which can record positive economic growth this year.” But it won’t recover to its 2019 level any time soon. “And,” he adds, “the long-term outlook is very murky, considering the significant worsening of China’s relationship with the developed world.”