Has China’s Economy Hit a Speed Bump?

By Stratfor Worldview
March 04, 2021

Recent data suggests China’s economy may be struggling rather than roaring back from a seasonal slump, and that its impressive headline growth numbers in 2020 hid an incomplete and unbalanced recovery. Forward-looking purchasing manager indices (PMI) reported by China after the Lunar New Year were just slightly above 50, which shows a growing economy, but possibly at a slowing rate that could be worrying to Chinese officials. It’s too early to tell if the recent dips are temporary, cyclical or symptomatic of a greater slowdown, but dependence on the old model of credit-fueled investment and exports may not be sustainable. If not, then projected supercharged growth of 8-9% in 2021 could be unattainable and inconsistent with the Chinese government’s official narratives.

Moreover, external demand as measured by the PMIs fell to contraction levels in February, dropping below 50, which could indicate the technology and medical equipment shipments from China that had been driving net export growth are running out of steam. That would not be surprising since the rest of the world may have absorbed all the work-from-home technology and personal protective equipment that it can. The global shortage of semiconductors may also be limiting exports. On the other hand, high-frequency indicators show economic activity picking up after the Lunar New Year to pre-holiday levels, which may not show an economy accelerating toward the projected growth of 8-9% for 2021. 

Until now, China’s economic recovery had been mainly supply-driven, based primarily on industrial production, public infrastructure investment and real estate construction, as well as an increase in exports of medical equipment and electronics used for remote work. Demand-side growth, however — in particular, household consumption — continues to lag, especially what apparently is a large build-up in personal savings from depressed consumption.

There are persistent questions as to whether Chinese economic data measures the same things as Western economic data, which is relative economic prosperity and well-being over time. According to government metrics, China was the only major economy that grew in 2020. GDP surged in the final three months by 6.5% (year-over-year) and, along with increases in the previous two quarters that wiped out the 6.8% first-quarter decline, resulted in total 2020 growth of 2.3%. Real GDP growth has been positive every year since 1976. This year, it has come at the cost of high debt, wasteful investment and lagging consumption. Moreover, China reports data on a production or value-added basis and not in the standard expenditure format used by the rest of the world, which breaks out consumption, investment, government spending and net exports. While this method theoretically matches the expenditure and income methods of measuring GDP, it makes it difficult to separate the sources of growth into their primary drivers.

China reports separate data for investment, foreign trade and some aspects of consumption. But those categories are not directly comparable to GDP expenditure categories. For example:

The direction of Chinese policy may, in fact, be a better indicator of its economy’s current state, as it reflects Beijing’s response to perceived economic conditions rather than backward-looking information that is subject to manipulation. Given the uncertainty in the COVID-19 dominated economy of 2020, the Chinese government dropped its annual growth target and may do so again this year. The 14th National People’s Congress that convenes on March 4 and related meetings will reveal whether that is the case.

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