The moving parts in China’s recent growth numbers are very similar to what they did before the pandemic. Firing up the old industrial model helped the country regain 2019 production levels while the global economy was still depressed, but it also shows long-smoldering fragility.
The Chinese economic data for May was a little weaker than economists expected, but still looks strong by Western standards. For a clear picture, it is best to compare the numbers released on Wednesday with their 2019 equivalents as these will not be skewed by the extremely unusual economic conditions in early 2020. Industrial production increased by 13.6% in the first five months of the year compared to the same period in 2019. On the same basis, retail sales are up 9.3%, fixed investments are up 8.5% and real estate investments are up 17.9 % gone up.
If a recovery led by investment in real estate and industrial production, and consumption lagging, looks familiar, it could be because the same could be said about the composition of China’s pre-Covid-19 growth. In contrast to the USA, where there are many questions, such as the huge stimulus the Shape of the economy, China has followed a proven script in its pandemic response.
Even the lagging retail growth numbers may exaggerate the underlying strength of the consumer economy compared to previous years. Prior to the pandemic, China typically had a large travel deficit on its balance of payments, meaning that Chinese travelers spend more abroad than those visiting China domestically. With the pandemic restricting international travel, some of that consumption is now likely happens at home. That might be true for a while, but probably not forever.
Two concerns about the shape of the recovery are immediately noticeable. The first, as Capital Economics’ Julian Evans-Pritchard points out, is that industrial export growth has slowed. Since industrial expansion has been driven in large part by exports, a slowdown of even very rapid growth could have a significant impact.
The second is what exactly is driving real estate investment. Buyer deposits have increased nearly 42% from their level in the first five months of 2019 and have become the dominant factor Source of developer funding. Buyers today are the main creditors of the country’s fragile real estate industry, although they may not be fully aware of it. Any disruption there could have financial repercussions and even cause a significant social shock.
China’s recovery has been impressive, but the pandemic hasn’t changed – and possibly made worse – the structural flaws that affected most worried pre-Covid-19 economists.
Write to Mike Bird at Mike.Bird@wsj.com
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