China is back

Let’s forget the Coronavirus epidemic, Trump’s health and the US presidential election for a while to take a look at China.

First, because China represents 19% of global GDP in PPP (17% in current USD). Then, because China is a FIFO country (First In, First Out). As the epicentre of the epidemic, it was the first to be hit, but also the first to emerge from the pandemic.

We are obviously aware of the Chinese authorities’ responsibility in the political management of crisis (distortion of facts, censorship, repression of whistle-blowers, rough promotion operations, etc.). Nor do we believe in the official data released by the authorities on the absolute number of recorded Covid-19 cases (90,000) and related deaths (less than 5,000).

However, we do believe in the trends of the last few months and acknowledge that China has managed to stamp out the epidemic in the country since the end of last winter. Moreover, we can stress the quality of economic management and the quality of macroeconomic results.

After shrinking 35% at an annual rate in Q1, GDP rebounded particularly sharply in Q2 (55%) and is expected to grow by 10 to 15% at an annual rate in Q3. China is the only G20 country that will record positive average GDP growth in 2020, at around 2.5%. Some would argue that this is normal because China is a less developed country and therefore its GDP growth is spontaneously robust. Yet the G20 includes another nine major emerging countries, which will all experience a major recession (for instance India’s economy will probably shrink by not much less than 10%).

Quantitative indicators overall suggest a further improvement in both production (steel output, rail freight) and consumption (electricity, commodity imports, auto sales, see charts infra).

The recovery was of course initially fuelled by investment and exports, underpinned by the global recovery, especially by the tech and healthcare sectors, which have enjoyed robust global demand amid the pandemic.

Bear in mind that retail sales returned to the pre-crisis level in August and many sectors in physical neighbourhood services, such as hospitality, are recovering significantly.

For those who believe air transport is definitely dead, domestic flights in China are almost back to 2019 levels. Overall, services have recovered clearly. The NBS non-manufacturing PMI rose to 55.9 in September, the highest level since December 2013. All in all, the road congestion ratio, which is representative of domestic activity, is quite noticeably higher than in 2019.

Momentum will obviously be somewhat held back by the rising default rate and deteriorating banks’ balance sheets. And obviously, the medium to long-term challenges remain, e.g. increased ageing, high leverage of the large companies sector, less na?ve stance of the west vis-à-vis China’s mercantile strategy, persistent trade war with the US, and ongoing restructuring of global value chains. Nevertheless, we believe China is better equipped to face these challenges. It has become less dependent on export markets and China’s improved skills in high tech and pharmaceuticals afford it greater market clout (it has a virtual monopoly in 5G and drugs active components) and secures new sources of growth. Furthermore, the authorities take a long-term view of their handling of the economy. They were able to react pragmatically to Trump’s trade war and the fallout from the pandemic. They took care not to initiate massive credit supply and focused on measures supporting domestic demand, new technologies and SMEs. The 14th five-year plan (2021-2025) scheduled to be released at the end of October is likely to highlight a focus on the domestic economy (tech, consumer goods, healthcare, etc.).