China's Economy Bounces Back As Pandemic Is Brought Under Control

China posted 4.9% economic growth in its third quarter compared to the same period last year, keeping it on track to be the only major global economy to record an economic expansion this year in the midst of the novel coronavirus pandemic.

Economists estimate China's yearly GDP growth could be north of 2.5% this year — even as the rest of the world economy is expected to shrink by at least 4%. That differential will give Chinese companies in sectors ranging from electronics to steel more global market share and greater economic influence.

"What you're seeing now is basically China's stability premium kicking back in, in the sense that companies now are dealing with a global pandemic, and many of the places that they would move production to aren't looking so rosy right now," says Michael Hirson, China and Northeast Asia practice head at the consultancy Eurasia Group.

Just about half a year ago, China appeared to be in dire economic straits as the pandemic, which began in its port city of Wuhan, caused a national lockdown of staggering scale. In May, Beijing abandoned its annual economic growth targets for the first time ever after its economy shrank 6.8% — the worst contraction in three decades.

"It was like a war. Our director told us, 'In these critical times, if you cannot hold up your end, I'll just find someone else to replace you,' " recounts Xue Yue, vice president at Thinova Magnet Co. Ltd., which makes rare earth magnets and sensors for automobiles and electronics such as smartphones.

The pressure to keep supplying Thinova's multinational clients was huge. Xue was able to resume production at Thinova in February by negotiating with dozens of villages to allow some 200 workers out of strict lockdown so they could return to work.

But since then, China has staged a dramatic economic recovery due to extensive, mandatory testing and quarantine policies. Daily new cases of the coronavirus have dropped to single digits. Subsequent outbreaks were contained by strict, city-by-city lockdowns that have allowed the national economy to continue operating even as some regions were temporarily sealed off.

So factories, including Thinova's, are humming again. Automobile sales have been growing at their fastest pace in two years. Real estate investment has climbed at double-digit rates for months, trickling down to related sectors such as steel and construction.

While China's economic statistics have been dogged by long-running suspicions of their veracity, economists say growth figures — despite not being perfectly accurate — are reliable as a general gauge of activity.

"Consumer demand is down, but because of the uncertainty about whether there might be a second wave [of the virus], our clients in North America have been stocking up on our components," says Xue.

A global advantage

By getting back to work earlier than other countries, China will gain an even larger slice of market share in key export industries in the manufacturing and commodities sectors.

"Global steel production dropped, so China's share of production can only rise. I estimate this year China will be at 60% of global steel production," says Li Xinchuang, president of the China Metallurgical Industry Planning and Research Institute, a state consultancy and industry body.

"In June and July we were importing steel, there was no [global] market for steel," Li says. "It was only China which wanted to buy, because our automobile and construction sector quickly recovered."

Because China's economy has recovered earlier and faster than that of other nations, including the U.S., its trade surplus this year will only widen.

That could exacerbate tensions with the U.S., which has long accused China of artificially pumping up its trade surplus at the expense of American manufacturers. The Trump administration made reducing the disparity in goods traded between the two countries a key demand in a trade war last year.

"The fact that China is back up and running smoothly, and in fact some evidence suggests that China is actually grabbing market share in export industries, will be a cause of concern for U.S. policymakers in particular," says Hirson.

Last year, the trade war and a difficult operating environment led some American businesses to consider moving some of their supply chain out of China. Popular alternatives include Southeast Asia, where labor costs have remained lower than those in mainland China.

But this year, the American Chamber of Commerce in Shanghai's latest survey found more than 78% of respondents will not move their operations, a more than 5% increase from last year.

Continued softness in consumer spending

China's economic recovery does have its weaknesses.

Much of the pickup in economic activity has come from investment in new manufacturing facilities and infrastructure.

That has outpaced consumption, meaning China is still making more stuff than people want or are able to buy. Retail sales have lagged behind last year, but picked up for the first time in August.

"The next key economic data we should watch out for is the inventory growth," or the amount of goods manufacturers have stockpiled, explains Bo Zhuang, head China economist at research firm TS Lombard.

Exports of home goods and electronics have climbed, driven by a captive market of consumers abroad eager to undertake home improvement projects while in lockdown or willing to splurge on work-from-home items such as computers or massage chairs.

But Bo says such export growth is limited, because many of the goods are one-time purchases.

"We should be worried about the Chinese export growth because for most of the households in Europe or the U.S., once you have got one laptop, you are not going to buy the additional one in the coming months," Bo says.

The lowest earners on China's socioeconomic ladder are struggling to bounce back to pre-coronavirus levels.

A Peking University study from July estimated 9% of the adult work force in China remains unemployed after being laid off during the height of the pandemic. Many of the newly unemployed are itinerant migrant workers who have struggled to find new, temporary work assignments and don't qualify for China's thinly synchresourced unemployment insurance programs.

"Overall, it's still an investment-driven story and what's lagging behind is mainly the consumption, especially for lower-income people related consumption," says He Wei, a China economist at the Beijing research firm Gavekal Dragonomics.

Unlike many countries — including the U.S. — China has not given cash payments to lower-income workers, many of whom have not been able to find work after the pandemic, further throwing supply and demand out of sync.

"Inequality will widen again, and this will weigh down the consumption growth," says Gavekal's He.

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