Commentary on Political Economy

Thursday, 16 July 2020

Good News, China's Growing Again. Just Don't Ask How

Old drivers such as exports and infrastructure helped the recovery. But that challenges a long-sought shift toward consumers.
Old models.
Old models. Photographer: Qilai Shen/Bloomberg
For all the talk about the pandemic producing a new normal, China’s economic picture sure looks a lot like the past. Exports and industrial production are moving ahead, and the government has big plans for infrastructure spending. Shoppers have taken a back seat, constrained by social distancing and job losses. Not so long ago, consumers were seen as the vanguard of a rebalanced economy, which grew to become the world’s second largest. Relying on shipments abroad, factories and massive public works was considered passe. 

This tilt backward is borne out in the data. On Thursday, China reported gross domestic product increased 3.2% from a year earlier. That’s better than forecast and a big improvement from the 6.8% decline during the first three months of the year.
Yet the bright spots carry their own complications. Industrial production climbed 4.8% in June and has recovered to pre-virus levels. Retail sales, the weakest link in the rebound, disappointed again, sliding 1.8% instead of the anticipated increase. Meanwhile, a separate report Tuesday showed both exports and imports gaining; the trade surplus shrank. 

This mix is understandable, but it’s not where Beijing wants to be. Through the past decade, no communique from the International Monetary Fund, G-20 or any multilateral organization was complete without references to the need to reposition China’s economy. Investment in the mainland by Western manufacturers, relatively cheap exports, factory job losses in the U.S. and a managed currency created political headaches.
For its part, China has been moving away from low-end production, where it was no longer overwhelmingly competitive. An expanding middle class could increasingly afford what was made at home and became an attractive lure for consumer icons like Starbucks Corp. and Hollywood studios. The shift suited everybody. 

Suffice it to say, Beijing hasn’t ditched rebalancing as a policy objective. Rather, circumstances have conspired against it. Further strides in containing Covid-19 or the arrival of a vaccine might the consumer economy return in full vigor. That would be welcome, given China powered a third of global consumption growth from 2010 to 2017, according to the McKinsey Global Institute.
Until then, relying on factories and exports is a precarious place to be. Ultimately, other countries must have sufficient demand to keep buying China’s stuff. A slow and uneven global recovery makes this a dicey proposition — even more so, given the economic competition between Washington and Beijing.
China's short-term growth drivers could end up constraining expansion in months, if not years, to come. Any hint of recovery is also a thin foundation on which to base hopes of a significant rebound in the rest of the world. Beijing’s ability to generate a bounce within Asia appears limited. For the first time in living memory, the region will suffer a contraction this year, according to the IMF.
It's important to remember, too, that China was able to record growth because it went into a shutdown earlier than most countries and was able to resume sooner. Its authoritarian political system could impose the kind of crackdown that has challenged democracies, especially the U.S., where something as straightforward as wearing a mask has become a front in a culture war. Many economists project a significant rebound in the global economy in the third quarter after a horrendous couple of months. China may be offering an advance peek at the scale of the initial revival and it isn’t brilliant. Few observers still cling to the idea of a V-shaped recovery.
China’s second-quarter expansion is better than a repeat of the fiasco in the first three months of the year. It’s nevertheless a recovery in minor key. Wouldn’t it be ironic if, instead of shattering the pre-existing world, Covid-19 returned economic conditions to more familiar terrain? 

No comments:

Post a Comment