China's Economic Recovery Continues, But More Troubles Await

China’s economic recovery continued in the third quarter of this year, although there was enough disconcerting underlying data that suggests that the world’s second-largest economy faces some significant challenges in the months ahead. In the third quarter of this year, the Chinese economy expanded by 4.9% on a year-on-year basis, in line with our forecasts, but below the expectations of many other forecasters. This came on the heels of a 3.2% expansion in the second quarter, as China suffered the brunt of the Covid-19 pandemic in the first quarter of this year, when its economy contracted by 6.8%. For China, this return to higher levels of economic growth will be welcome, but for the rest of the world, there are some causes for concern.

While the 4.9% GDP growth recorded in the third quarter was the highest rate of growth in China since the fourth quarter of last year, there had been hopes among China’s policy makers that growth would exceed 5%, and perhaps approach 5.5%. On the positive side, Chinese exports expanded by more than expected in the third quarter thanks to a surge in the exports of medical equipment due to the Covid-19 pandemic, and of electronics, due largely to looming sanctions on Huawei and other Chinese high-tech firms. On the other hand, consumer spending in China, while accelerating last month, remained well below the levels that had been hoped for as the pandemic eased in China. As a result, China’s trade surplus has risen sharply in recent months, helping the economic to recover, but raising concerns among many of the country’s leading economic partners.

The fact that China returned to economic growth earlier than all other major economies in the second quarter, and that growth accelerated in the third quarter, has led to many countries expressing their concerns about China’s position within the global economy. As its share of global exports has risen sharply during the pandemic, many of the issues that led to the trade war between the United States and China, and the worsening trade disputes between China and many of its other leading trade partners, are certain to resurface. At the same time, the fact that consumer demand in China is not growing as fast as had been hoped will concern exporters in other parts of the world that are dealing with continued weak levels of demand in both their home markets and in most of their leading export markets outside of China. As China’s trade imbalances rise, its relationship with other major economies is likely to deteriorate further.

It is important to remember that the Chinese economy was already in the midst of a slowdown when the Covid-19 pandemic erupted in early 2020. There were many reasons why the Chinese economy was slowing prior to the pandemic, and many of these reasons will remain in place whenever the pandemic comes to an end. For example, the trade disputes between China and many of the world’s other leading economies, most notably the United States, are likely to continue, no matter who resides in the White House in Washington. Furthermore, economic relations between China and a number of other leading economies are likely to grow more strained as those economies’ struggle to recover from the Covid-19 pandemic. At the same time, the geopolitical tensions that have risen between China and other major powers are likely to continue, forcing other countries to attempt to lessen their dependence upon China for a variety of manufactured goods.

Finally, China is entering the so-called middle-income trap, where one-time poor countries enter middle income status and find it very hard to match the growth rates that they achieved in previous years. As a result, China’s economic recovery might well prove to be far less robust than was previously expected, and the likelihood that long-term economic growth in China will continue to slow remains very high. This will have major implications not only for China, but for the world as China’s global influence continues to increase.

?Michael Weidokal is an author and speaker on global economic and geopolitical issues, as well as the Executive Director of ISA (International Strategic Analysis), one of the world's leading global market intelligence and economic forecasting firms.

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