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Monday, October 19, 2020
The Caveats Behind China's Economic Recovery
ANBOUND

On October 19, China's National Bureau of Statistics (NBS) released the economic data for the first three-quarters of the country. According to preliminary calculations, China's GDP in the first three quarters of this year has reached RMB 72.2786 trillion, an increase of 0.7% year-on-year in terms of comparable prices. On a quarterly basis, it fell 6.8% in the first quarter, grew 3.2% in the second quarter, and increased by 4.9% in the third quarter.

China's economic growth picked up again in the third quarter, driving the country's economy back to positive growth in the first three quarters. Against the backdrop that the global economy is still beset by the pandemic and many economies are mired in negative growth, China's economic recovery is undoubtedly a considerable achievement. However, the growth rate is not reassuring in terms of the health of the economy itself. In the first three quarters of this year, China's economy grew by only 0.7% year-on-year, which basically set the pattern of economic growth for the whole year. Researchers at ANBOUND estimate that a 2% annual growth rate for the Chinese economy in 2020 would be a decent performance. We have noted that Yi Gang, governor of the People's Bank of China, also said that China's economy is expected to grow at an annual rate of 2% this year. It also reflects the central bank's assessment of the economy this year.

It should be noted that China's economic growth picked up to 4.9% in the third quarter, possibly the highest third-quarter growth rate in the world. (Vietnam, which has a strong economy, grew about 2.62% year-on-year in the third quarter and 2.12% year-on-year in the first three quarters) However, the 4.9% quarterly growth rate was still well below market expectations, with most economists expecting more than 5%. This may be one of the reasons why the Chinese stock market closed lower that day.

If we look at the breakdown of economic data, we can find more worries behind this economic recovery.

The industry is the sector that has relatively recovered well in the economic categories. In the first three quarters of this year, the value-added of industrial enterprises above designated size increased by 1.2% year-on-year (down 1.3% in the first half of the year), among which, the third quarter saw year-on-year growth of 5.8%. However, the efficiency of industrial enterprises is declining. From January to August, the profits of industrial enterprises above designated size reached RMB 3.7167 trillion, down 4.4% compared with the same period last year. The industrial recovery could recover faster, and this is related to the characteristics of the industry; that is the reason why the production system of China, the "world's factory", is recovering faster than the service industry and consumer activity.

Investment growth, while recovering, also shows certain concerns. In the first three quarters of this year, China's fixed-asset investment (excluding rural households) reached RMB 43.653 trillion, up 0.8% from a year earlier. The growth rate changed from negative to positive for the first time this year, despite dropping 3.1% in the first half of the year. In terms of sectors, infrastructure investment grew by 0.2%, the first time this year that the growth rate changed from negative to positive; manufacturing investment was still down 6.5%, while investment in real estate development rose 5.6%. It is worth noting that in the first three quarters of this year, private investment reached RMB 2.4398 trillion, down 1.5% and 5.8 percentage points less than in the first half of this year. It is obvious that private investment and manufacturing investment are still in a state of negative growth.

In terms of foreign trade, in the first three quarters of this year, the total value of imports and exports of goods reached RMB 23.11151 trillion, up 0.7% year-on-year, and the growth rate changed from negative to positive for the first time this year. Among them, the year-on-year growth in the third quarter and the second quarter was 7.5% and 0.2%, respectively. The value of exports reached RMB 12.710.3 trillion, up 1.8%; the value of imports reached RMB 10.404.8 trillion, down 0.6%; the trade surplus was RMB 2.3054 trillion. In September, imports and exports totaled RMB 3.066.3 trillion, up 10% year-on-year; the value of exports reached RMB 1.662 trillion, up 8.7%; the value of imports totaled RMB 1.4043 trillion, up 11.6%. Under the trade war, such foreign trade figures should be deemed as decent performance.

The slow recovery in consumption is the most worrisome problem, and this has become an obvious shortcoming in China's economic recovery. In the third quarter, total retail sales of consumer goods rose 0.9% year-on-year, with quarterly growth finally turning positive for the first time in the year. In the first three quarters of this year, the total retail sales of consumer goods reached RMB 27.3324 trillion, down 7.2% year-on-year, while the country's total online retail sales were RMB 8.0065 trillion in the first three quarters, up 9.7% year-on-year. Based on the consumption data of the first three quarters, there is reason to be wary about whether the annual consumption of goods can return to positive growth. As consumption accounting for more than 50% of China's economic growth, a prolonged slump in consumption growth could be a significant drag on the overall recovery.

In addition to the impact of the COVID-19 pandemic, the consumption downturn is also related to poor income expectations. In the first three quarters of this year, per capita disposable income rose by 3.9% in nominal terms, but after adjusting for price factors, the real growth was only 0.6%, turning positive for the first time this year, and there was a decline of 1.3% in the first half of the year. It is worth noting that the per capita disposable income of urban residents reached RMB 32,821, up by 2.8% in nominal terms but down by 0.3% in real terms. The per capita disposable income of rural residents was RMB 12,297, up 5.8% in nominal terms, and 1.6% in real terms. It can be seen that the real income of urban residents, which account for the majority of consumption has experienced negative growth, and this will have a direct impact on consumption.

Macroeconomic performance has always been supported by microeconomics. If we look at the microeconomic subject, i.e., the enterprises, things appear to be even more pessimistic. Before the outbreak of the pandemic, China's economic growth had slowed down in recent years; the downward pressure has increased, and there has been a large number of enterprises that operate poorly. The pandemic has exacerbated business woes, with a large number of enterprises closing down, and even if they still barely survive, a significant portion of them have cut capacity. In the current Chinese market, except for the large state-owned enterprises, enterprises are generally facing a state of lack of vitality. Under such circumstances, it is difficult to support the Chinese economy by relying only on a few areas such as large state-owned enterprises, big project investments, and new infrastructure.

Final analysis conclusion:

As indicated by China's economic data in the first three quarters this year, first of all, the achievements of China's economic recovery should be acknowledged, and secondly, we should see the problems hidden within China's economy. China's economic development is not in a race with other countries to see who will get rid of negative growth first, but instead, it is to solve its own development issues. In this regard, the economic recovery in the first three quarters is still insufficient, and more benign economic recovery is needed in the future, especially in terms of revitalizing more enterprises, so as to put China's economy into a sustainable state of growth.

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