China’s economy has room to grow more

7 December, 2020 12:00 AM printer

BEIJING: China’s economy seems largely to have bounced back from the COVID-19 shock. It registered 4.9 per cent annual growth in the third quarter of 2020, and the rate may well exceed 5 per cent growth in the fourth quarter.

The result would be at least 2 per cent annual full-year growth – not bad at a time when much of the world is facing a pandemic-induced recession. But that doesn’t mean smooth sailing ahead, report agencies.

Consumption growth is a key consideration in determining China’s likely overall performance in 2020.

While final consumption figures for the third quarter are not yet available, total retail sales of social consumer goods offer a useful proxy.

Unfortunately, the picture is not particularly bright: Though monthly growth in retail sales of social consumer goods has turned positive since August, total sales fell 5.9 per cent year-on-year in the first 10 months of 2020.

The consensus in China is that the annual growth rate of retail sales of social consumer goods will turn positive only at the very end of this year, despite the recovery in household consumption.

And past experience suggests that final consumption growth will be even lower. In 2019, for example, the figures were 6.3 per cent and 8 per cent, respectively.

Another key determinant of economic performance is capital formation. Here, we are also awaiting the latest figures. But we do have data on fixed-asset investment. And, again, the news is mixed.

In the first 10 months of 2020, fixed-asset investment grew by 1.8 per cent year-on-year. This growth was driven, first and foremost, by real-estate investment, which grew at a rate of 5.6 per cent during the same period. But real-estate investment has shown signs of weakening.

Moreover, the most important component of fixed-asset investment – manufacturing investment – was down 6.5 per cent year-on-year in the first three quarters of 2020. Though growth picked up a bit last month, it was still deep in negative territory.

Typically, when GDP growth is lower than potential growth, China’s government uses every possible lever to promote infrastructure investment. After the 2008 global economic crisis, for example, the country implemented a 4 trillion renminbi (US$609 billion) stimulus package that spurred as much as 44.3 per cent growth in infrastructure investment in 2009.

That hasn’t quite happened this time around – and it shows. Infrastructure investment increased by just 0.2 per cent year-on-year in the first three quarters of 2020. Growth picked up somewhat last month, but only to 0.7 per cent.

One area where China has exceeded expectations is export performance. Although official data are not yet available, there is good reason to think net export growth may have exceeded 10 per cent so far this year.