Stronger, broader-based growth in China’s economy in the third quarter of 2020 underscores that it will be the only major economy to end the year with a larger GDP than it began with. Downside risks remain, but the opportunity to further Beijing’s strategic goals could bear economic fruit in the form of furthering policies that foster domestic self-reliance, even as low consumption persists and a resurgence of Covid-19 in the United State and Europe threatens Chinese exports.
According to official government statistics released on Oct. 19, China’s GDP growth accelerated to 4.9 percent year-over-year (y-o-y) from 3.2 percent in the second quarter of 2020, even as it fell somewhat short of predictions. Negative growth for the year was reversed with the economy expanding by 0.7 percent in the first nine months of 2020, including a 6.8 percent decline in the first quarter. This shores up the public image of the Chinese Communist Party ahead of the Oct. 26-29 plenary session, where it will formulate the country's 14th five-year economic plan. In doing so, the party will have to make tough decisions on how to account for the pre-pandemic structural slowdown in Chinese growth, reorient the economy toward consumption instead of exports, and adapt to rising US-China tensions in the economic and tech realms.
Consumption appears to have stabilized, although demand for services continues to be the weak spot. Retail sales, which had been negative for much of the year, rose 3.3 percent y-o-y, the second consecutive monthly increase. But sales are still down by 7 percent overall for the year. All categories of services consumption are also down for the year to date.
Fixed asset investment increased for the first time in 2020 and is 0.8 percent above the level of the first nine months of 2019, with much of the growth in technology-related industries. Nonetheless, a revision of methodology by China’s National Bureau of Statistics may have given undue weight to this category of expenditure, casting doubt on whether fixed asset investment did, in fact, rise in the third quarter. Imports were up sharply by 13.2 percent, which helped depress growth from expectations, but is also a sign of reviving domestic demand. The import surge may have contributed to the shortfall in GDP growth from expectations as net exports contributed only 0.6 percent to that growth. On the supply side, industrial production grew by 6.9 percent in September, marking the sixth consecutive monthly increase and the fastest rate this year, with medical equipment and technology accounting for much of the rise.
The slow recovery in consumption and the services sector fuels concerns about the breadth and depth of China's overall economic recovery from Covid-19, which has been driven by Beijing’s longstanding growth strategy of emphasizing heavy industry and infrastructure build-outs. That may be reversing somewhat in the most recent reporting period, with a return to more balanced growth. But the trend will not be clear until fourth quarter data is in. There are also signs that parts of the Chinese interior are lagging behind, with declines in credit growth in the post-industrial northeast (Liaoning) and a contraction in local fiscal spending. Inequality between the coast and interior has long been an issue in China, and Covid-19 appears to be exacerbating it, raising questions about employment and stability.
Inequality between the coast and interior has long been an issue in China, and Covid-19 appears to be exacerbating it, raising questions about employment and stability.
Until September, state-owned enterprise (SOE) production fueled much of China’s recovery, but the rate of private enterprise production overtook SOE production last month. Credit and a massive infrastructure push have propped up property prices, with public investment up by 4 percent year-over-year. Private investment growth may have outstripped public investment in September, but is still down by 1.5 percent from January-September. Infrastructure has been particularly important in propping up growth in poorer interior and northeastern regions, with risks that a drawdown in government spending will lead to a growth slowdown there.
With Covid-19 cases again rising in the US and Europe, the failure of many advanced economies to contain the pandemic is also a potential threat to Chinese exports. Any renewal of trade tensions with the United States, in particular, could also depress net exports. Surveyed urban unemployment was down slightly by 0.2 percent to 5.4 percent in September. That measure, however, overstates the health of the labor market, with low-skilled and migrant workers continuing to suffer. Real-time, high frequency indicators of labor markets show continued problems. Rising corporate and household debts are a chronic concern. Major questions remain about the long-term sustainability of China’s debt burden, which the pandemic has likely only expanded.
Strong growth compared with the rest of the world is a critical element of China’s overall geopolitical strategy, a point underlined by President Xi Jinping’s new so-called “dual-circulation” model. First touted in May, the model aims to refocus on domestic production and consumption while increasing China’s push for technological self-reliance. The pandemic-related downturn in global demand has added urgency to these efforts, potentially allowing for a kick-start in terms of reorienting exports toward the domestic market, including resource and agricultural output from the rural interior. The dual-circulation model is also expected to play a prominent role in China’s upcoming five-year plan alongside efforts to increase centralization and party oversight of key industries and businesses.
