Doubts cloud China’s post-coronavirus recovery

Doubts cloud China’s post-coronavirus recovery

From her old apartment in central Beijing, Amanda Wu used to admire late-night views of the China World Trade Center, one of the tallest buildings in the capital.

But after a pay rise failed to materialise, Ms Wu, a 28-year-old marketing researcher, moved to an apartment in the suburbs where she shares a room with a friend for half the price.

“The price of the view is too high for me now,” she said, adding that she has decided to save money. “I used to live pay cheque to pay cheque, but I don’t feel financially secure any more.”

Although China’s economy is widely expected to return to growth in the second quarter after a historic contraction at the start of the year, its citizens continue to grapple with the consequences of the coronavirus pandemic and view the future with uncertainty.

The government can support the face of industrial production, but not overall GDP, not overall economic growth

“The pace of recovery is uneven,” said Qu Hongbin, co-head of Asia economic research at HSBC, who expects growth of 1.2 per cent in the second quarter compared with last year, when gross domestic product data is released on Thursday. “It’s not yet a full recovery”.

In the first quarter of the year, growth fell by 6.8 per cent in China’s first annual decline on record in more than forty years.

Economists anticipate that Thursday’s figures will highlight a mixed recovery: government support for industry will help push growth higher, but long-term pressure on consumption will continue to weigh on households and businesses.

China’s industrial production — which tracks areas such as manufacturing, mining and energy — is expected to have performed strongly in the second quarter. After an 8.4 per cent fall in the first quarter, it returned to growth in April and May. 

A rise in industrial activity has helped propel China’s share of global steel production to record levels, as local governments pursue infrastructure projects to stimulate their economies. In May, the central government raised the total amount of “special purpose” debt they can take on for such projects to Rmb3.75tn ($531bn).

The measures echo the Chinese response to the 2008 financial crisis, when infrastructure spending was increased to support the economy, albeit on a greater scale.

Iris Pang, chief China economist at ING, said the recovery in industry was driven by fiscal stimulus, but that industrial activity may fail to “amplify” other areas, such as consumption.

“The government can support the face of industrial production, but not overall GDP, not overall economic growth,” she said.

Alongside industrial activity, China’s services sector showed signs of strong recovery in June. But retail sales, another important component of the country’s economic performance that tracks the purchase of finished goods and services, have remained weak in the second quarter, falling 2.8 per cent compared with the same period last year in May.

In about 200 Chinese cities, local governments have issued coupons designed to stimulate consumption and support local businesses, which may be reflected in an improvement in Thursday’s retail sales data.

These measures were taken against a sharp increase in savings across China as employment — which contracted in June, according to a widely used survey of economic activity — came under pressure. Total household deposits have risen by Rmb14.5tn this year, according to data from the People’s Bank of China.

A UBS survey estimates that, while 92 per cent of respondents had returned to work by May, two-thirds of them reported lower incomes and 62 per cent decreased their consumption in the past three months. The survey found that people were spending more on daily goods and less on travel, offline entertainment and restaurants.

“The consumer will remain relatively cautious until we have a vaccine, until we have a real medical solution,” said HSBC’s Mr Qu, who pointed to the likelihood of more coronavirus outbreaks in individual Chinese cities.

Consumption is also in focus outside of China’s borders, where the virus continues to rage. But on Tuesday, new customs data showed an unexpected rise in exports in June, which increased 0.5 per cent compared with the same month last year, though exports remain down overall in the first half of the year.

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Analysts at Normura suggested the trade data reflected a catch-up after a backlog in the first quarter, China’s ability to constrain the pandemic, and stimulus in the US and other big economies supporting demand.

But, as may be the case on Thursday, that positive data were tempered by a pessimistic outlook. Li Kuiwen, spokesperson for China’s customs administration, pointed to a “grim and complicated external environment”, adding that “uncertainties faced by China’s foreign trade development are still increasing significantly”. 

In Beijing, which was briefly plunged into lockdown again last month after a virus outbreak, Ms Wu has the impression that China’s business is picking up slowly. But the company she works for has customers all over the world. 

“It’s hard to predict when our business will be back to normal and I’ll get a pay raise,” she said. “I can see the number of new cases jumping every day outside China.”