Almost nine months from when China saw the first cases of coronavirus and seven months since its lockdown began, the country now appears to be firmly on its way to economic recovery.
Below, Matthews Asia investment strategist Andy Rothman discusses four themes surrounding the Chinese recovery and the impact they could have.
Controlling Covid-19
Along with the rest of the world, the crucial part of any economic recovery is keeping the coronavirus under control, something which China has been reasonably successful at since the initial outbreak.
China was the first country to enter a full-scale lockdown on 23 January after coronavirus broke out in Wuhan, setting a template the rest of the world would soon follow.
So far China has had a total of 84,888 coronavirus cases. Some 79,685 of those cases recovered and there have been 4,634 deaths. Compared with somewhere like the UK, which has had 320,286 cases but a much higher death total at 41,381, China appears to have controlled the virus much better.
“In the first 12 days of August, there were a total of only 420 new Covid-19 cases in China, and of those, only 262 were the result of local transmission (the others were among people who had arrived from abroad with the disease). In contrast, during the first 12 days of August, there were 651,880 new cases in the US and 10,617 in the UK,” Rothman said.
Of course, some have expressed doubts over the accuracy of China’s coronavirus data, suggesting that the country could be downplaying the extent of its outbreak. However, Rothman said there are two reasons why he thinks China has not been deliberately falsifying its Covid-19 data since it put Wuhan under lockdown on 23 January.
“First, if the number of hospitalisations and deaths were significantly higher than the official statistics, we would be hearing about it on social media from the family and friends of those patients,” he said. “Second, the numbers reported by China have been consistent with data from other places in the region which undertook similarly aggressive efforts to control the virus.”
V-shaped economic recovery
As stated above, the key to any country’s economic recovery is controlling coronavirus and safely reopening the economy, something it seems China has done.
“Life in China has been gradually getting back to normal since March and July was the fifth consecutive month of a V-shaped economic recovery,” said Rothman.
China’s GDP was up by 3.2 per cent at the end of Q2 compared to last year’s result.
According to data from the International Monetary Fund (IMF), China’s growth for 2020 is predicted to be 1 per cent. It is the only major economy with a positive growth prediction for this year.
This recovery from Q1’s sharp contraction has been partly driven by the fact that China is a very domestically focused economy and with businesses reopening it has seen a comeback in consumer spending. In other words, it didn’t have to wait for the world to reopen to get back on track.
“China's economy is increasingly driven by domestic demand, so it is important that consumer spending has been bouncing back,” Rothman said.
“Last year was the eighth consecutive year in which the consumer and services (or tertiary) part of China's GDP was the largest part. Although consumer spending is likely to remain softer than usual until next year, on a relative basis China is likely to remain the world's best consumer story.”
This isn’t to say that China’s domestic sales story is completely recovered, as Rothman highlighted that China’s domestic sales in automobiles, residential property and services industries are down year-on-year but have still increased from the Q1 nosedive.
“This is why I expect China's economic activity to return to about 80 per cent of normal by the end of this year, with the final 20 per cent of the recovery unlikely until after an extended period of time with very few new Covid cases in China, the global pandemic under control, or the development and widespread use of an effective vaccine,” the Matthews Asia investment strategist added.
US-China trade war tensions increase, again
The political tensions between the US and China took a welcomed deescalation at the end of 2019 when Phase One of a ‘peace deal’ was signed.
But tensions have been rising with president Donald Trump publicly placing the full blame of the coronavirus pandemic onto China. And recently Trump launched an attack on the tech front, ordering a ban on two of China’s major apps: WeChat and TikTok.
Earlier in August, Trump made an executive order titled ‘Addressing the Threat Posed by WeChat’. In it he cited concerns over fears of espionage and hacking of US data via the Chinese apps. Trump has called for all transactions over the apps to be banned.
This announcement was made just weeks ahead of when the two superpowers were due to resume trade deal talks.
On the executive order, Rothman said that banning WeChat will mainly hurt individuals communicating with family or friends back in China since only a small proportion of the app’s overall user base is in the US.
But he added that some real damage could be done to US companies who use the app and banning it “would have a significant negative impact on those firms in one of the world's largest and fastest growing consumer markets”.
Rothman said: “More generally, we should recognise that it is not possible to decouple from China's economy, which last year accounted for 40 per cent of global economic growth, larger than the combined share of global growth from the US, EU and Japan.
“Moreover, it will be very difficult for the US to address global issues like climate change, nuclear proliferation and drug trafficking without cooperation from the Chinese government.”
Political tensions won’t impact on China’s economy
“Although I am pessimistic about the near-term trajectory of the Washington-Beijing political relationship, I remain optimistic about China's economic prospects,” Rothman said.
“Because China is a domestic-demand driven economy, there is a low risk that bilateral political tensions will derail the V-shaped economic recovery described earlier.”
Helped by policies such as ‘Made in China 2025’, China has shifted from being a purely exports reliant economy to a domestically driven one, meaning that even if the US completely shut its doors to China the economy wouldn’t crumble.
Last year, domestic consumption accounted for almost 60 per cent of China's GDP growth, Rothman said, and only 17 per cent of its exports went to the US in 2019.
“China's share of global exports actually ticked up a bit,” he said. “Even a complete breakdown in the bilateral political relationship would likely generate only a very modest drag on China's economic growth.”