Chinese economy emerges stronger from unprecedented virus test

China’s economy has bounced back from COVID-19 with resilience on effective virus control and targeted stimuli as a pandemic depression continues to threaten the world. With GDP growth reaching 3.2 percent and 4.9 percent in the second and third quarters, respectively, the world’s second-largest economy completed the upward leg of a V-shaped recovery from virus-induced lockdowns that sent it into a rare 6.8-percent contraction in the first quarter, Xinhua reported on December 13. In its latest Economic Outlook report, the Organization for Economic Co-operation and Development (OECD) predicted that China will be the only major economy to record positive performance in 2020 with 1.8-percent growth.

By the end of 2021, global gross domestic product is projected to reach the pre-pandemic level, with China expected to account for over a third of world economic expansion, according to the OECD report released on December 1. As a more encouraging sign, China’s exports jumped 21.1 percent year on year in November in US dollar terms, the fastest growth since February 2018, thanks to strong demand for medical goods and electronics, it added. However, the brisk recovery has not been easy to come by. Refraining from hastily resorting to massive stimulus measures, China adopted a clear and consistent approach: containing the virus first with stringent public health measures and then rolling out monetary and fiscal policies to revive economic activities, the report said.

COVID-First Strategy

China’s “post-COVID rebound is gathering momentum amid a developed world that remains on shaky ground,” Stephen Roach, a senior fellow at Yale University, said in an article published by Singapore-based news network Channel NewsAsia. Mr Roach attributed China’s quick economic recovery to the deployment of a “COVID-first strategy” in which the country “insulates its citizens from a virulent pathogenic contagion with public health measures” first and then “makes judicious use of monetary and fiscal policy to reinforce the post-lockdown snapback”. This is in sharp contrast with some developed countries where debates focused on using monetary and fiscal policies as frontline countermeasures, rather than taking public health measures to contain the virus in the first place, Mr Roach noted. Indeed, China set virus containment as a top policy priority at the beginning of the outbreak, concentrating medical resources and exercising strong epidemic control despite massive economic costs. Factories were shut down, schools were closed and many contract-based services, such as entertainment and travel, were either fully stopped or shifted online to contain the spread of the disease. Masking, temperature monitoring, and health QR code scanning have become new norms in the COVID-19 era in China. When it comes to reopening the economy, China took a targeted and agile approach. Differentiated policies were adopted for economic and social order restoration in different regions, with areas with low-risk of COVID-19 encouraged to return to normalcy first, Xinhua said in the opinion piece. Meanwhile, China seemed to be able to perform a delicate balancing act between virus containment and economic recovery, thanks to improved testing capacity and tracing.

Targeted Policy Mix

The country’s fast recovery rests partly with the extraordinary macroeconomic policy mix of raising the deficit, tax relief, cuts in lending rates, and banks’ reserve requirements. “Unlike its European and US counterparts, China stayed away from using a deluge of stimulus policies but implemented more targeted counter-cyclical adjustments,” said Xu Hongcai, deputy director of Economic Policy Commission of the China Association of Policy Science. Compared with the 4-trillion-yuan (about 612 billion US dollars) stimulus package China adopted to cope with the 2008 financial crisis, this year’s measures were “gentle,” said Zhang Yansheng, chief researcher of the China Center for International Economic Exchanges. To maintain stable liquidity while avoiding money flooding the market, China’s central bank put more focus on enabling structural policy tools, including re-lending and rediscount programs. China’s financial institutions saved enterprises 1.25 trillion yuan during the first 10 months, and are expected to save 250 billion yuan more in November and December. Stabilizing employment has been a macroeconomic policy priority throughout the year as it closely relates to people’s well-being and social stability, Xinhua said. Due to relentless job creation efforts, the country’s unemployment rate reached 5.3 percent in October, the lowest of the year. Over 10 million new urban jobs were created during the first 10 months, meeting China’s annual target ahead of schedule, according to data from the Ministry of Human Resources and Social Security.

Sound Growth Ahead

For small and medium-sized businesses – the main drivers of job creation – debt and uncertainties remain major challenges. Mr Xu said he expects macroeconomic policies to continue to focus on protecting market entities and boosting employment next year, which is crucial to stabilizing households’ income expectations and increasing their willingness to buy. “Extraordinary measures should be phased out in 2021 instead of an abrupt exit,” he said. In its third-quarter monetary policy report, China’s central bank pledged to make its prudent monetary policy more targeted and flexible to adapt better to the needs of high-quality development and put more focus on the efficiency of financial services to support the real economy. Morgan Stanley predicted that policymakers will likely normalize credit growth and its fiscal stance next year with a full recovery in the labor market and deployment of COVID-19 vaccines, according to its November report. Noting that 2021 will be an important year for China in advancing modernization, a meeting of the Political Bureau of the Communist Party of China Central Committee on December 11 called for sound and precise implementation of macro policies, keeping the economy running within a reasonable range and adhering to the strategy of expanding domestic demand next year. Reforms on both supply and demand sides should be carried out to achieve a dynamic equilibrium on a higher level, in which demand and supply can boost each other, the meeting said. “China’s overall economic efficiency has improved in recent years due to supply-side structural reforms. As the country will deepen reforms on both supply and demand sides in years to come, the economy will see greater growth potential,” Mr Zhang said.

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