EMERGING MARKET: CHINA IS THE FIRST MAJOR ECONOMY TO REPORT GROWTH POST-COVID 19 PANDEMIC
In our Emerging Market series, we explore the strengths, weaknesses, opportunities, and threats within modern emerging markets. Since the start of the COVID-19 pandemic, growth in most markets has come to a screeching halt, with many countries experiencing significant economic contraction. Now, nearly 10 months after Coronavirus originated in China, the first major global economy has reported growth. We’re profiling China as the first emerging market post-COVID-19 based on its reported 3.2% growth in the second-quarter.
CHINA’S ECONOMY BOUNCES BACK
Following a historic 6.8% contraction in the first quarter, the Chinese economy is reporting a 3.2% increase in economic performance over last year’s second quarter. This makes China the first economy to report growth and recovery since the onset of the coronavirus pandemic earlier this year.
The International Monetary Fund is projecting the Chinese economy to grow 1.2% overall for the full year and reporting that China’s COVID-19 related support policies, including spending, loans and guarantees, will only make up 2.5% of the nation’s GDP. Comparatively, COVID-19 support in other major countries is much higher, with the U.S. reporting 11% of overall GDP, Japan reporting 20%, and Germany reporting 34%.
Currently, China is the only large economy to report positive economic results during 2020 and is therefore avoiding a technical recession (defined as two consecutive quarters of negative GDP). However, fiscal and monetary stimulus restraints from Beijing alongside consumer spending concerns may indicate less global assistance than China has previously supplied.
THE (UNEVEN) ROAD TO RECOVERY
Despite the overall an uptick in the Chinese economy, analysts have noted a discrepancy in the distribution of recovery among Chinese citizens. While the majority of the nation’s wealthier citizens have emerged from the pandemic financially unscathed, many with low income levels are struggling.
Nearly as soon as the economy began to reopen, high-end consumer spending in China began to recover. In fact, more than a dozen luxury western brands reported double-digit revenue growth in the Chinese market during 2020’s Q2, just as sales in other parts of the world sank. Commercial property broker, Savills, recently reported that luxury shopping malls within many of China’s largest cities saw a strong footfall rebound — in some cases exceeding pre-virus levels. Similarly, luxury car sales saw an over 25% increase during May and June despite being lackluster for the past two years.
Meanwhile, per capita consumer spending among low to middle income groups fell 6.2% during Q2, following a 9.5% drop earlier this year. Estimates indicate that unemployment among these low to middle income households is over twice the national average.
Despite the IMF’s prediction that the Chinese economy will continue to grow during 2020, many analysts question whether the growth will benefit lower income consumers, arguing that the weaknesses in domestic consumption for these lower income families underscores the need for more policy support to bolster the recovery after the shock of the coronavirus crisis. The Chinese government’s initial response to the pandemic focused efforts on stimulating investment and construction — the industrial side of the market - rather than the consumer side. In addition, any consumer-led measures have benefited wealthier households rather than average income families.
WHAT CHINA’S RECOVERY COULD MEAN FOR THE WORLD ECONOMY
Although the Chinese market is unlike any other economy in the world, there are some key indicators that may set a precedent for economic recovery across the globe.
First, the Chinese economy attributes over one-half of GDP to consumer spending. Because of this, the Chinese government attempted to stimulate consumer spending through pre-paid vouchers for specific products. Despite the disconnect between this stimulus and the lower income families (whose population far outnumbers that of high income families), the key takeaway is that China’s focus was on preserving domestic consumption during the lockdown and recovery phases.
Another key area to watch will be how the Chinese government handles mobility restrictions to their service sectors, especially within the hospitality industries that provide many urban jobs. China’s recreation industry was expected to suffer the most, especially due to the onset of the virus during the economy’s most popular travel holiday, the Chinese New Year. Transportation, trade, and communication services are other hard-hit industries.
Finally, the Chinese government is focusing on policies that benefit the stock market by cutting interest rates and increasing borrowing. While this will strengthen government purchasing of debt, it remains to be seen how these policies play out in the long-term, especially with mounting concerns about joblessness in the short to medium term.
While the depth of the global economic disruption caused by Coronavirus is still uncertain, China’s recovery shines as a beacon of hope to many countries around the world. With the appropriate economic stimulus measures in place, analysts are optimistic about the potential for recovery in most markets.
China is unlike any consumer market in the world. There are immense opportunities and significant challenges, especially post-COVID-19. CASTUS has proven experience and success in the Chinese market and can help you navigate the complexities in order to realize opportunities. Please reach out to us via our contact page or email us at email@example.com.