Why China is not gunning for a roaring economic recovery

Name: Chinese businesses still face grim economic reality despite Covid-19 restrictions being lifted
Uploaded: 2020-07-29T09:00:12.000Z
Duration: 5 min 26 s
Description: Chinese businesses still face grim economic reality despite Covid-19 restrictions being lifted

China’s GDP rebound belies an uneven recovery and a widening gap between the real economy and capital markets. Instead of more stimulus, Beijing will want to rebalance the economy and carefully unwind policy easing

GDP growth should hit 5-6 per cent for the second half, and 2.3 per cent for the whole year

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Visitors at a government event to encourage consumption in Beijing on June 6. China’s priority on restarting production in industrial and manufacturing firms has left consumption a laggard in the recovery process. Photo: AP

Aidan Yao

Published: 5:00pm, 29 Jul 2020Updated: 10:22pm, 29 Jul 2020

China’s better-than-expected second-quarter gross domestic product (GDP) showed that its economy has rebounded from rock bottom, leading the rest of the world out of the ravages of Covid-19. Quarter-on-quarter GDP growth expanded by 11.5 per cent after a 10 per cent contraction in the first quarter, giving it the appearance of a V-shaped recovery, which few thought possible just a few months ago.

Underneath the solid headline, however, lies a multi-speed recovery across the different sectors of the economy. In general terms, supply has outpaced demand, investment has outgrown consumption, and the industrial sectors have fared better than the tertiary sectors.

This uneven recovery is partly a result of different responses to the pandemic. Resuming production in many industrial and manufacturing firms was as simple as pressing the restart button. But to revive consumption, households need to feel safe enough to return to social activity; and the lingering fear of Covid-19 relapses has slowed normalisation.

Also contributing to uneven growth has been Beijing’s policy stimulus. The design of China’s stimulus package disproportionately benefited the industrial sectors, with much policy effort devoted to work resumption, infrastructure investment and lowering funding costs, unintentionally benefiting the property market and housing construction.

In contrast, households are not a direct beneficiary of stimulus and thus, with labour market conditions and wage growth slow to recover, consumer spending has been held back.

05:26

Chinese businesses still face grim economic reality despite Covid-19 restrictions being lifted

The different designs of policy stimulus could explain, in part, the different shapes of recovery across major economies. In the United States, for example, significant policy easing has been devoted to saving jobs and subsidising income losses. This led to a strong rebound in consumer spending in May, although the latest virus resurgence could set back this economic normalisation.

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