Commentary on Political Economy

Tuesday, 23 June 2020

COVID-19 undid 3 years of economic progress in China. Don’t expect a quick rebound, these expert says

There is a lot of desperation: not just from Beijing, but Washington as well, this observer points out

People wearing protective gear are pictured inside the terminal at Beijing's international airport on June 17, 2020 after more than 1,200 flights were cancelled and schools in the Chinese capital were closed again as authorities rushed to contain a new coronavirus outbreak linked to a wholesale food market.

A quick return to economic normalcy after the body blow of the coronvirus pandemic isn’t in the cards, if China is any indicator, Leland Miller says.
Miller is CEO of the China Beige Book, which attempts to provide a peek into the notoriously veiled economy. Right now, that view is grim.
China Beige Book’s just-released second-quarter report shows “an economy still mired in deep recession,” its analysts noted. Even more problematic, Miller said in an interview, it implies that the government of the world’s second-largest economy is willing to walk back steps toward a more progressive economic model in order to claw out of the deep recession created by the virus that was first identified there in December.
The firm, which uses survey data from over 3,300 Chinese companies and 160 bankers in 34 industries across the country as source material, reports that most measures of business activity are “down massively” compared with a year ago, even if the second quarter shows a modicum of improvement over the previous three-month period.
In fact, second-quarter 2020 data on its own would be the worst in the firms’s decade-long history, if not for Q1.
Among Q2’s highlights: only 22% of all firms borrowed at all, despite the difficult economic conditions, and despite bank interest rates being at the lowest level in nearly a decade. CBB’s analysts take particular note of the lack of borrowing among retailers, who may be “either already bankrupt or sufficiently worried about their prospects that borrowing to stay afloat has no appeal,” they conclude.

China Beige Book headline metrics. Source: China Beige Book.

CBB also noted regional disparities in the second-quarter results. Export-heavy areas are still in contraction mode, as are profits for Beijing-based firms. “A sharp contraction in foreign orders, (in Shanghai) and nearly everywhere, illustrates just how deeply the global demand shock has roiled the economy,” the analysts wrote. “China cannot return to normal until its powerhouse regions get off the mat.”
Perhaps most worrisome: the only signs of life during the quarter were among transportation construction firms, which reported gains in revenue, profit, and access to credit. For China-watchers, that’s a red flag. As the CBB team asked rhetorically in the report, “Are we about to see a return to the old Beijing playbook of heavy infrastructure stimulus as the solution to flagging growth?”
If so, it would be a step back. The Chinese have recognized for years—in part thanks to Western criticism—that they need to transition their economy to focus on the service sector, Miller explained, and have been managing that transition effectively since at least 2017, refraining from overbuilding even during slowdowns.
“They need to be building more productive investments and they know that,” he said. “Now, for the first time in years, we see a big pickup in transportation construction, which signals that they are now so worried about growth that they’re willing to reverse themselves. Will this be a return to their old playbook of building bridges to nowhere and ghost cities?”
It’s unclear if, indeed, the data from CBB indicates any genuine shift in economic policy to combat the harmful effects of the pandemic.
Anyone interested in China policy or markets needs to take the possibility of a reversion toward a manufacturing-focused economy seriously, Miller says. “The Party is wedded now to a narrative that it has beaten the virus and the economy is going to recover. They have little choice but to put out upbeat data no matter what happens.”
“The divergence between economy and reality could become massive and the Chinese government is more motivated now than in a long time to flat-out lie,” he told MarketWatch.
Beijing’s economic health imperils the trade agreement signed in January, Miller says. Despite recent reports that the Chinese will accelerate purchases of soybeans and other farm goods to meet the initial phase of the trade pact, it won’t be possible for the country to fulfill all of its obligations.
“Maybe they can make good on some, but it’s going to be very difficult for [President] Trump to stick with it given the extremely strong anti-China rhetoric in the run-up to the election and an enormous populist anger with China because of COVID,” Miller said.
“It’s clear [Trump] really wants to. He thinks the deal is meaningful and he’s not ready to walk way. The agriculture deals would benefit his base. But if he keeps it, he’s going to end up with a deal that is failing at a time of strong anti-China rhetoric,” he said.
Until the Chinese economy recovers fully, the rest of the globe can expect less demand for things like commodities, not to mention a disrupted supply chain, Miller believes.
“You’re not going to see Chinese growth return to anything near the previous rates,” if the rest of the world doesn’t also improve, he added.

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