The Chinese economy has a domestic-demand-shaped hole in it that is hindering its own bounce back from the coronavirus crisis and the global recovery.
China was the only major economy to expand in 2020, achieving GDP growth of 2.3%, as authorities got on top of the country's COVID-19 outbreak relatively early. The International Monetary Fund anticipates China's economy will grow by 8.1% in 2021 as the country puts the pandemic behind it, outstripping the U.S. at 5.1%, euro area at 4.2% and Japan at 3.1%.
Soaring demand from other developed economies has breathed life into China's economy, while China's own sluggish recovery in domestic consumption is a weight on the global resurgence both in terms of the country's growth and demand for the products of exporting countries, experts say. That contradicts the narrative that China — considered the growth engine for the global economy this century — is leading the world's recovery, said Shaun Roache, chief economist, Asia-Pacific at S&P Global Ratings.
"The weak recovery in Chinese household spending is certainly holding back the momentum of global growth," Roache said. "If anything, China's growth is being supported by the rest of the world, as reflected in a rising current account surplus in the last nine months."
Daily new cases of COVID-19 fell to zero in China in March 2020 with just a handful of subsequent minor outbreaks, according to the Our World in Data project at the University of Oxford. This allowed the Chinese export machine to kick into gear in response to the sudden global demand for medical equipment such as personal protective equipment.
The reopening of developed economies then bolstered demand for home electric appliances, vehicles and automatic data processors, boosting total Chinese exports by 60.6% year over year to $468.87 billion in the January-February period, according to government data.
Exports to the U.S., China's largest trading partner, surged 87.3% in January and February, contributing to a trade surplus of $51.26 billion. Roache warns that surplus, up from $42.2 billion two years ago, is something Washington may begin to take a closer look at.
Total consumption — a combination of household and government spending — acted as a drag on China's economy in 2020 to the tune of negative 0.5 percentage point of GDP, according to the National Bureau of Statistics in China. In 2019, consumption made up 3.5 percentage points of the total 6% growth in GDP, according to national statistics.
Instead, growth in 2020 was driven by the old model of investment and net exports, which contributed 2.2 percentage points of GDP growth and 0.7 percentage points, respectively.
"So far, the recovery in China has been led largely by external demand and policymakers would like to focus more on consumption recovery, moving away from its reliance on external demand and supply of key products," said Ho Woei Chen, an economist at United Overseas Bank, or UOB.
The lack of demand in China is apparent in consumer prices, which fell 0.2% year over year in February, following a 0.3% decline in January, with both food inflation and non-food prices continuing to declines. By contrast, the producer price index — which indicates the change in price of manufactured goods — rose 1.7% as a result of external demand.
Retail sales rose by 4.6% in December 2020 and 3.9% in January 2021, according to Ratings. That was well short of the roughly 8% growth that dominated before the pandemic hit, suggesting an impact from prolonged social distancing measures.
Retail sales data released March 15 suggest signs of improvement as the figure jumped 33.8% year over year in the January-February period. However, this result was buoyed by a low base due to the impact of COVID-19 in 2020, which hit China earlier than the Western world.
UOB calculated that when compared to the pre-pandemic level in January and February 2019, retail sales were up by an average of 3.2% in two years. Restaurant sales jumped by 68.9% from a year earlier but were still down by an average of 2.0% year over year in the previous two years, according to UOB.
Retail sales have recovered more quickly in developed economies, most notably in the U.S., which recorded annualized growth of 6.3% in February. This was a faster pace of growth than before the pandemic, when sales in February 2020 grew by 4.5%.
Evolving China's economy
The weak consumption figures are also an unwelcome development for Beijing's policymakers, who want to transition the burden of growth in the long term onto the growing middle-class consumer base and away from debt-fueled investment and industrial exports.
The country had been making some progress. China's gross exports — including exports of imported components — fell to 17.8% of GDP in 2019 from 36% in 2016, as domestic demand outpaced external demand, according to Oxford Economics. Yet national statistics showed that household consumption in China still accounted for just 39% of GDP — 38.718 trillion yuan, or US$5.96 trillion — in 2020. This compares with 55% and over for other large economies, according to Ratings.
The inability of the government to trigger a surge in consumption contrasts with the developed economies of the U.S., European Union, Japan and U.K., which are expected to benefit from a boom in consumer spending as the rollout of vaccines and reopening of service industries unlock trillions of dollars of excess household savings built up during the pandemic.
The problem of stimulating consumer spending is a long-term issue for the Chinese government. Private consumption has broadly kept pace with overall growth but has not increased its share in the overall economy.
"This is to a large extent because, every time there is downward pressure on growth, the tried and tested way to stimulate the economy that the government opts for is via boosting investment," said Luis Kuijs, head of Asia economics at Oxford Economics, noting Beijing's preference of stimulating growth through infrastructure and property investment.
Beijing believes an increasingly urbanized population is part of the answer and included raising urbanization to 65% — from 60.6% in 2019 — as part of the 14th five-year plan unveiled by the National People's Congress from March 5-11.
China's leadership expects urbanization will deliver increased income levels and expand the middle-income class to encourage consumption upgrading to more expensive goods. But to really unlock spending, analysts say policymakers need to improve social welfare coverage so that households reduce their precautionary savings.
"Until Asia starts pulling its weight in the demand recovery, global growth will fail to live up to its potential. The recovery will remain over-dependent on stimulus and consumers in Europe and the U.S. Asia may see persistent economic slack, low inflation, and a steady turn lower in expectations for revenue growth for some firms," Roache said.