Clear Waters and Blue Skies for China’s Economy in 4Q and Beyond

The China Guys
Nov 5, 2020 · 9 min read
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Image via: Adobe Stock

Summary

Following its first economic contraction since Mao Zedong held office, China has set precedent as the first major economy to return to growth. While the road to recovery has been riddled with bumps indicative of lopsided development, Q3 results, paired with well-targeted policy support, are painting a promising outlook for China’s development into Q4 and beyond.

Looking Back at China’s Mid-2020 Results

Lopsided Growth in Q2

Following China’s first economic contraction since Mao Zedong held office, China’s 3.2% GDP growth in Q2 surprised economists, who had forecasted growth around the 2% mark. While growth is growth nonetheless, the drivers behind China’s GDP pointed to lopsided growth. Departing from precedent, China’s largest driver of growth, household consumption, had fallen flat in Q2. This powerhouse segment typically contributes around 40% of China’s GDP in a good year, yet at the end of Q2, consumption remained in negative territory.

Secondary Industry Drives Economic Gains in Q2

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Sources: National Bureau of Statistics, The China Guys

Gross Fixed Capital Formation (GFCF)

GFCF covers new investment into fixed assets like buildings, equipment, and infrastructure. This component of growth comprised a whopping 156% of China’s Q2 GDP, while consumption weighed on growth at -73%.

Infrastructure Shines Among Shadowed Investment in Q2

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FAI=fixed asset investment. Sources: National Bureau of Statistics, The China Guys

Q3 Activity Gains Steam

China’s economy as a whole grew by 4.9% in Q3, bringing 2020 aggregate growth into positive territory at 0.7%. Not only did the new quarterly figures surpass those of Q2, but they were also more closely aligned with pre-pandemic compositions. The three components of GDP growth — final consumption, GFCF, and imports/exports — contributed to growth at 34.9%, 52%, and 13.1%, respectively. While trade remained stable, consumption saw enormous gains from its -73% contraction while GFCF dropped to more normal levels from its 156% gains in Q2.

Tertiary Industry Regains Its Footing in Q3

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Sources: National Bureau of Statistics, The China Guys

Looking Forward at China’s Economy in Q4 and Beyond

Trends in Income

With two months left in 2020, the economic outlook for China’s Q4 and beyond is quite strong. Alongside the recent release of Q3 GDP data, the National Bureau of Statistics also released quarterly data on incomes. After falling off sharply, per capita disposable income nationwide grew by 0.6% year-over-year while median income grew by 3.2%, pointing to positive job and wage growth. While particular concerns have been placed on China’s lower wage earners who shouldered the hardest blow in the pandemic due to uneven distribution of stimulus relief, rural households that tend to be associated with low incomes saw average disposable incomes reach CN¥12,297 (US$1,852), or CN¥675 (US$102) higher than incomes at the same time last year.

China’s Median Incomes Recover Alongside GDP

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Sources: National Bureau of Statistics, The China Guys

Trends in Employment

Despite its efforts, Beijing’s policy support still fell short. In the period following quarantine, troves of workers filed for unemployment. At the outbreak’s peak in February, China’s unemployment rate jumped from 5.3% to 6.2%; however, unemployment has since leveled at 5.4% as of September.

Promising Capital Inflows

While the World Investment Report 2020 estimated that global foreign direct investment flows shrank by more than 40% in the first nine months of 2020, China’s FDI inflows had been steadily rising. By September, China had received more than CN¥700 billion worth of foreign investment, up 5.2% year-on-year.

Clear Waters & Blue Skies in 4Q and Beyond

2020 has challenged the global economy with near-unprecedented levels of systemic risk. While China took a heavy blow, the nation’s strong virus containment measures and well-targeted stimulus response has quickly brought its economy back from the brink. Q3 figures have pointed to a better balanced composition of organic growth while prospects for 4Q and beyond look even more promising. While it may be premature for Beijing to reign in economic support measures during the remainder of 2020, officials will likely re-evaluate their supportive positions in 2021. Rebounding consumption and investment, paired with incremental market reforms, hint to sustained foreign investment in China over the coming year — particularly if other major global economies continue to stagnate under the weight of the outbreak. All in all, China’s growth miracle seems to have plenty of road left to travel.

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The China Guys

Written by

Stay in the know with TCG’s fresh perspective on China’s economy, business environment, and political landscape.

Data Driven Investor

empower you with data, knowledge, and expertise

The China Guys

Written by

Stay in the know with TCG’s fresh perspective on China’s economy, business environment, and political landscape.

Data Driven Investor

empower you with data, knowledge, and expertise

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