China's Dilemma Now Is How To Revive Demand in a Shattered Population
For the first time since the Cultural Revolution in 1966, China’s economy has contracted. This will be confirmed when the National Bureau of Statistics releases GDP figures for the first quarter of 2020 tomorrow. The sometimes starry-eyed view about the resilience and durability of high Chinese growth will not be the same. More important than what happened to the economy during the lockdown, however, is what happens next, what the lessons for the West are and whether our concerns should focus less on economic growth and more on survival.
Because China is about six to eight weeks ahead of the western world in the pandemic, we should take note of what has happened in the country. A comparable or worse contraction is bulldozing its way through the world economy as you read this.
The official GDP data in China are among the least informative and most manicured of the copious volume of statistics that is produced. They lack any real sense of cyclicality or volatility, but it will be hard, and non-credible, for the bureau not to report that GDP fell. All the component economic data we have already say that it did.
Long-distance transportation by air and rail and subway system volumes in cities all dropped by more than half compared with a year ago. Car, other retail and land and property sales fell by between a third and two fifths. Manufacturing investment dropped sharply, as did exports. Industrial production and services output fell by about 15 per cent.
The consensus view is for an annual drop of about 6.5 per cent, corresponding to a quarterly drop of just over 10 per cent. Yet a lot of private sector economists think that the annual fall could have been as high as 15 per cent to 20 per cent. Even in cities and provinces far from the main lockdown areas, disruption to supply chains caused production to stall.
Top officials probably will not want to comment about 2020 being the year in which the Communist Party’s pledge to double GDP and income per head over the past decade was to have been fulfilled. Further, the ritual of announcing formally a new GDP growth target for the year, usually at the annual meeting of the National People’s Congress in March, is still up in the air. The meeting was cancelled and there is no confirmation about when it will be held this month, if at all. There is no politically acceptable target that can be met now, and the authorities may try to write this year off as an aberration. But is it?
This is what makes the post-lockdown economy so challenging in China, and for us in due course. People talk about a recovery that may be shaped like a V or a U, or even an L-shaped non-recovery into 2021. This carries additional political significance in China because next year brings the much-trumpeted centenary of the founding of the Communist Party, where typically it will champion its heroic role in China’s economic and political development, past, present and future.
But can China solve the fundamental contradiction now between economy and epidemiology? Because of the latter, the country went into lockdown, forcing the economy into a massive supply shock in which labour and capital both froze. The demand shock is derived from this. Many governments conflate the two.
China’s response has included some demand stimulus, but by and large it has taken the form of survival-type bridging finance by the central bank, local governments and Beijing to keep markets liquid, banks whole and firms in business. It is thought that the government is planning to announce some significant new demand stimulus programmes and bank lending, not necessarily the best form of stimulus for a country with China’s debt issues, rose sharply last month.
With the lifting of the lockdown, production among state-owned enterprises and heavy industries, such as coal and steel, is back to about 80 per cent to 90 per cent of where it was at the start of the year. Construction sites, factories, offices and shops are open again.
Factories are open again, but China is still reeling from Covid-19
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However, people’s behaviour is generally still wary. Retail and property transaction volumes are pretty subdued. It is estimated that nearly half a million small and medium-sized companies, many of which had been in business for less than three years, folded in the first quarter. Few will reopen. We can only guess at the unemployment rate, which was officially just over 6 per cent in February — but this is urban-only, an understatement and excludes China’s 280 million migrant workers, many of whom haven’t returned to work. Including the latter, it could be 15 per cent to 20 per cent of the workforce.
The problem, as is commonly understood, is the risk of sparking new infections as the economy gradually reopens, leading to new restrictions. China has experienced just this in moderate form in the past week or two, although it claims that these cases are predominantly people returning to China, especially in the northeast from Russia. While there is no strong evidence of a strong rise in hospital admissions, cinemas and other leisure places that opened have closed again, subway and retail volumes are lacklustre and some residential compounds have had restrictions re-imposed.
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