The China Dashboard – Summer 2020
China’s economy was the first hit by COVID-19 and the first to rebound. Reform proclamations issued in April and May by implication acknowledged that myriad past plans had never been accomplished, and that work to reorient China to market-based systems remained to be done – urgently. The recovery seen today is not the result of marketization. Quite the opposite, it is the result of emergency government interventions that have buoyed activity in recent months.
However, by further placing the burden of public policy on ostensibly commercial or murky quasi-governmental balance sheets, the interventions have made it even harder to realize market allocation reform ambitions without risking a meltdown. Given the hostility leveled at the Communist Party of China from the United States, and China’s superior economic performance amid the pandemic, leaders in Beijing could be forgiven for thinking they had made the right call. But in the long-term picture, China’s deferral of reform is not a response to international hostility but a cause of it, and today’s economic expediency will make the net cost of righting China’s policy foundations much greater tomorrow.
As we go into the autumn of 2020, the outlook for China’s economy is more important than ever. The prognosis for recovery from the COVID-19 recession is crucial: even before the pandemic, China accounted for more global growth than the United States, Europe, and Japan combined, and with the rest of the world in various stages of lock down, it is the only place reporting positive year-on-year (yoy) activity.
But just as important as the quantity of China’s growth is the question of what is fueling it: reform or statism? Because a statist recovery, if it displaces and delays important policy reform, will sacrifice China’s future growth and will further provoke a protective backlash from the liberal market world. Consider the quantity and quality dimensions of China’s economic recovery.
As of this writing, we have official data partway into the third quarter, through July 2020. China’s recovery has been uneven and driven mainly by government-juiced infrastructure and property construction. Investment contributed 5% to China’s 2Q2020 GDP growth of 3.2% yoy, while consumption subtracted 2.3%. Net exports also contributed positively to growth, as foreign consumers’ need for products from China – especially medical supplies and equipment – remained strong while domestic demand remained unrecovered. Weak household consumption was evident in the 1.1% yoy decline in headline retail sales in July. This imbalance points to slower growth in the second half of the year, though from this low baseline and thanks to good virus control, China’s consumption will continue to gradually pep back up.
The bottom line is that China has achieved a partial recovery from the COVID-19 recession. The sharpest uptick was seen in June as pent-up demand from five months of closure was released, quickly tailing off starting in July. China’s positive numbers were made possible by diligent lock-downs to break virus transmission in 1Q2020 and massive testing to contain new outbreaks, allowing growth-promotion policies to do their work. Debt burdens still mounting from the past stimulus made it impossible to restore 6%+ growth this year, but the 1%–2% full-year outcome Beijing is now tracking would be the world’s most impressive in this catastrophic year.
However, there is a problem with this strong showing. Unlike the advanced market economies, China is years behind on long-term structural economic policy reforms essential to future growth and stability. Everyone needs statism to steer through a pandemic; efficient markets remain crucial, and too distant, thereafter.
Beijing announced reforms in April and May that tacitly acknowledge that decades of past effort to instill market economy systems have failed to succeed. On April 9, 2020, the Communist Party and State Council jointly released guidance on making market mechanisms more important. On May 18, the Party Central Committee and the State Council issued a more comprehensive reform decree (“Guidance on Speeding Up the Improvement of the Socialist Market Economic System in the New Era”). The long list of critical reforms identified in this plan is similar to the 2013 Third Plenum Decisions plan. It other words, the promised 2013–2020 reform did not happen, as this Dashboard has been noting. The May guidance stressed employment priorities, the limits of monetary and fiscal policy for sustaining growth, and a host of reforms to the marketplace needed to staunch an exodus of private and foreign firms. These included greater sanctity for private business property; improved intellectual property (IP) and trade secrets protection; serious reduction of informal, illegal but common market entry barriers; and better competition review mechanisms.
Current Chinese policy essentially validates the conclusions we have drawn in the China Dashboard since our inaugural publication in mid-2017: reform work has not progressed sufficiently to date and has even regressed in important areas.Explore the China Dashboard China Dashboard - Summer 2020 - Full Report