Why is the Chinese economy growing after COVID-19?

According to official statistics, China is the only country in the world that has seen its gross domestic product (GDP) boost in 2020. What is the reason for this phenomenon?

According to the Chinese National Statistical Institute (National Bureau of Statistics) the GDP of the Asian country expanded by 2.3% in the whole of the previous year.

This growth contrasts sharply with the contraction suffered by the world’s largest economies due to COVID-19, especially if we consider that the origin of the pandemic took place precisely in China.

Weo Report January 2021

So how can we understand this growth in times of global crisis?

A different economy

“The first thing to keep in mind is that the Chinese economy today is very different from what it was a few decades ago.”

The first thing to keep in mind is that the Chinese economy today is very different from that of a few decades ago. During this time, the country has been increasingly integrated into international trade networks, especially through the relocation of industrial processes from Europe and the United States. In this way, although it is still a highly regulated economy by the State, it has little to do with the autarkic isolation of other communist countries such as Cuba or North Korea.

Proof of this is the prominence of exports, which in 1960 accounted for just 4.31% of GDP and in recent years have stabilized to touch 19%, according to World Bank data. We can also find a similar evolution in imports, which allows us to conclude that the degree of openness of the Chinese economy to the world has been growing, despite maintaining protectionist practices such as exchange rate intervention or controls on foreign investment. .

In fact, according to the same sources, if we quantify trade openness as the sum of imports and exports over GDP, we will see that, in 2019, this variable in China (35.65%) already exceeded the United States (26 , 31%). Although it is not a perfect indicator, this evolution in this indicator, which measures the weight of trade on GDP and, therefore, its trade openness, can give us an indication to assume that the Chinese economy is increasingly linked to the global economic activity.

Another factor to take into account is that the distribution between the three large economic sectors is different in China compared to Japan, Europe and the United States. In the first place, agriculture has a greater weight than in the average of developed countries, employing 25.36% of the employed population and contributing a production that represents 7.11% of GDP (data from 2019). Let us remember that these same values ​​in the euro area that year were 2.88% and 1.55%, respectively.

The manufacturing sector also has a greater role than we observe in other large economies. If in China these activities generated a production that accounted for 27.17% of GDP, in the euro area it amounted to 14.27% and in the United States only 11.26%.

On the contrary, some of the activities of the service sector such as leisure or tourism have less relative importance in global GDP. All this means that the social distancing measures implemented around the world have had a different impact on the Chinese economy, compared to that experienced in other major economies.

Booming and crisis sectors

“The pandemic has led to a sharp change in consumer habits around the world, and the Chinese industry has been able to meet the new needs of consumers.”

In the case of agriculture, the impact has not only been limited, but the sector has even expanded more than the economy as a whole, with a growth of 3%. As has happened in other countries, the stability in the demand for many products (especially linked to domestic consumption), and the greater ease of taking distancing measures, has reduced the impact of the pandemic on activity. In the case of China, perhaps we could add as an additional factor the fact that a good part of agricultural production depends relatively less on international demand, since a good part of it is used to feed the most populous country in the world.

Industry, on the other hand, presents a greater degree of external openness and, therefore, has not been exempt from the difficulties that the world economy has gone through; although this has not prevented him from growing. The reason is that, although there was a sharp decline in activity in the first quarter of 2020, since then there has been a rebound in various sectors.

These activities, enhanced by the pandemic, include those related to medical supplies (masks, gloves, gowns, etc.), but also products related to electronic devices whose demand has benefited from teleworking. Another positive factor for the Chinese industry has been the increase in online purchases to the detriment of local businesses, since many of the large e-commerce distributors have their suppliers in China.

We could therefore say that the pandemic has led to a strong change in consumer habits around the world, and that the Chinese industry has been able to meet the new needs of consumers in other countries. The latest GDP data is a clear indicator of this phenomenon: the industry has grown at 2.4% per year and, even more surprising, the evolution of the IT sector shows how it has expanded by 16.9%.

The services sector, on the other hand, has been more affected, with the hotel industry leading the falls with -13.1%. Retail sales have also fallen in the last year (-1.3%), but as we have mentioned, these activities have a relative weight within GDP that is lower than that of other developed countries, which has helped to cushion the impact on the total of the economy.

Reasons for optimism?

“Although it is a positive figure, there has not been such a negative growth figure since 1976, when the GDP contracted by 1.57%.”

At first glance, these data seem to give sufficient reasons to affirm that the outlook for the Chinese economy in the face of the new year that is beginning is clearly positive. However, there are also other factors that can complicate compliance with these provisions. First, while it is positive that GDP has been able to expand in 2020, we must not forget that it has done so at a very low rate for a country where average growth in recent decades has been around 7%. In fact, such a negative figure has not been recorded since 1976, when GDP contracted by 1.57%.

On the other hand, in recent decades, one of the objectives of Chinese economic policy has been to maintain growth rates above 8% per year, since traditionally it has been considered that this level was the minimum necessary to absorb every year the millions of new workers entering the labor market or moving from the countryside to the city. Today, the demographic slowdown could perhaps partially lower this requirement, but in any case we must not assume that rates of 2-3%, which would be very positive in Europe or the United States, could have such a positive effect on the larger emerging economy. of the world.

Finally, there is also a certain degree of uncertainty regarding the trade war with the United States. As we have discussed in previous posts, the protectionist turn in US economic policy seemed to be a hallmark of the Trump administration, but Biden’s victory does not necessarily have to be a change in this regard. Rather on the contrary, the new president of the country included in his electoral program the “Made in America” ​​plan, a series of measures to give priority to domestically manufactured products, which could continue to widen this harmful conflict.

In short, the future of the Chinese economy is almost as difficult to predict as the evolution of the pandemic that, in just one year, has changed the world. In any case, there is no doubt that with some countries in crisis and others recovering, with the stimulus plans prepared by numerous governments, as well as the change in the White House and the departure of tycoon Donald Trump, a new economic panorama is opening. in which the Asian giant, as the second largest economy in the world, will play a decisive role.

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