'Rocky road ahead' for China's economy after bounce-back

Tom Rees
·4-min read

China was the only major economy to survive 2020 without shrinking but concerns are growing about a potential second wave of Covid infections.

The world’s second-largest economy expanded 2.3pc last year as it ended 2020 on the front foot, new figures from Beijing revealed.

The rise in GDP bucked the trend across the world but was still China's worst annual performance in decades. Growth in the fourth quarter beat expectations to hit 6.5pc year on year, powered by a 7.3pc rise in industrial production.

China is expected to be the only large economy to grow in 2020 after brushing aside a collapse in global demand and strict lockdowns to curb Covid cases. By comparison, Germany's economy contracted 5pc last year while forecasters expect the UK to suffer a 10.9pc drop in GDP and the US a 3.5pc fall.

However, analysts are warning that a “rocky” road lies ahead for the Chinese economy as infections begin to pick up again. The country is experiencing its worst spurt in cases since the first wave with Beijing, putting almost 30m people under new lockdowns after an outbreak in the province of Hebei.

China was the first country to resort to draconian restrictions to control cases but has largely avoided the multiple waves seen in Europe and the US.

“While the number of cases looks paltry there relative to current levels in Western countries, this can be a cause of concern ahead of the mass mobility of the lunar year holiday,” said Gilles Moëc, chief economist at AXA Investment Managers.

Commerzbank economist Hao Zhou warned that the “road ahead remains rocky” as Beijing is likely to take measures to limit travel during the Chinese New Year celebrations to rein in cases.

“All these clearly point to a downside risk for first-quarter GDP growth, particularly as the services sector will likely get a blow.”

Even if Beijing can control the new outbreak, a number of other obstacles remain, analysts have warned.

Lockdowns in the West have shifted some spending patterns in China’s favour. Economists believe shoppers are splashing out on the consumer goods China produces while they are unable to spend on services that are under restrictions, such as hospitality. China may also have benefited from supply chain problems in countries that have gone into subsequent lockdowns.

“As the developed countries have re-imposed lockdown measures due to virus resurgence, the supply chain has been disrupted, which forced many orders to shift to China as the economy has been normally operating,” said Mr Zhou.

“In our opinion, the strong exports have significantly contributed to China's economic outperformance.”

Old headaches that were slowing down the Chinese economy before Covid, from US tensions to excessive debt, are also expected to return.

Analysts note that Beijing has restarted its efforts to slash its debt pile after pausing its deleveraging campaign to cope with the trade war and Covid. Some have warned Beijing could trigger a mini-credit crunch if it tightens policy and toughens regulation too quickly.

Stimulus will also begin to be removed but only in “baby steps in the first half”, said Freya Beamish, economist at Pantheon Macro. She argued that growth was in fact closer to 0.9pc last year, with the Beijing-inflated numbers “preparing markets for normalisation” of policy.

Economic Intelligence newsletter SUBSCRIBER (article)
Economic Intelligence newsletter SUBSCRIBER (article)

The biggest bump on the road to recovery could be arriving in the White House on Wednesday.

Donald Trump launched a damaging trade war with China that put tariffs on goods worth hundreds of billions of dollars. His exit does not mean the US will seek to cool trade tensions, however.

President elect Joe Biden is expected to take a tough, multilateral approach to levelling the playing field in global trade.

Mr Zhou said Mr Biden would “reach out to traditional allies to form a broad-based China policy”, meaning tensions would “remain elevated in the years to come”.

Iris Pang, economist at ING, warned the “risk of a technology war between China and some economies remains if the US does not remove some measures”.

“We expect the newly elected US government will continue most of the current policies on China, at least for the first quarter.”