An overview of China’s economy and how coronavirus affected it

4 min read

China has been the highest contributor to global economic growth for more than a decade. The capitalist market reforms introduced by Deng Xiaoping in 1978 paved the way for its impressive growth journey.

China has set one of the best examples of how opening up of an economy can transform a country into a dominant economic power. Here’s an overview of the Chinese economy, and how it’s been affected by COVID-19.

Growth Numbers

Since 1978, the mainland has clocked an average annual growth rate of close to 10%, pushing its annual contribution of 1.1% to global economic growth back then to 39% in 2019. A report suggests that during 1979-94 “productivity gains accounted for more than 42% of China’s growth and by the early 1990s had overtaken capital as the most significant source of that growth.”

In later years, China’s growth started to become heavily reliant on credit and investment, which was exposing it to vulnerabilities. To contain such risks, China began to move towards a “more consumer-based, inclusive, and sustainable growth path.” This transition amid domestic structural issues kept its growth in single digit during the past decade.

Despite that slower pace of growth, China is the second-largest economy in terms of nominal GDP of $14.14 trillion, and the largest in terms of purchasing power parity (PPP) GDP of $27.31 trillion. In 2019, it constituted 16.38% of the world economy.

On The Global Stage

China is a major global player in trade in terms of both exports and imports. The country became the world’s largest exporter of goods in 2009, and the largest trading nation in goods in 2013. Today, China accounts for a staggering 13% of total world exports. Given its huge base of manufacturing exports, China has often been dubbed as the world’s factory.

Over recent years, it has transitioned towards a consumption-based economy; however, manufacturing remains at its core. The prominence of China is even more evident for trade in manufacturing intermediate products—the inputs and components used in global value chains. In 2002, China accounted for only 4% of this trade segment, but today, its share is nearly 20%, according to UNCTAD data.

China’s exports to the U.S. (and fewer imports) and the resultant U.S. goods trade deficit has been a trouble point between the two nations. 2019 witnessed a trade war in the form of a series of tariffs and counter-retaliatory tariffs, among other restrictions. To ease tensions and avoid further escalation, U.S. and China entered a trade deal in early 2020 which involves partial rollback of past tariffs and pause in additional tariff hikes in the first phase.

China has also been increasing its research and development (R&D) expenditures over the years. The country’s contribution to the growth of worldwide R&D expenditures has been 32% over the period 2000–17. China was the second-largest performer (behind the U.S.) accounting for 23% of the global R&D total of $2.2 trillion in 2017.

China has the world’s highest foreign exchange reserves; it stood at $3.107 trillion at the end of February 2020. China is among the major holders of the U.S. securities as it holds close to $1.07 trillion of the U.S. Treasury (end January 2020).

The McKinsey Global Institute (MGI) analyzed the mutual exposure of China and the rest of the world on trade, technology, and capital, and found that from 2000-2017, China managed to reduce its exposure to the world, while the world’s exposure to China increased.

Its economic boom has lifted 850 million people out of poverty, improved standards of living and created its middle class, although multiple challenges remains in terms of income inequality and upliftment of people. The changing demographics backed by rising income levels and the passion to travel abroad have turned China into the world’s largest source market in tourism. In 2018, there were around 150 million outbound trips from mainland with Chinese tourists spending over $277 billion during their travel abroad. China’s outbound tourism market is expected to reach $365 billion by 2025.

Amid COVID-19

The original epicenter of COVID-19 took place in Wuhan, China, a city of 11 million people. Given the magnitude of the problem, the Chinese government was quick to respond to the situation by imposing strict containment measures, including extension of the Lunar New Year holiday, lockdown of provinces, social distancing, large-scale mobility restrictions, and a 14-day quarantine period.

While several fiscal and monetary measures were announced by the Chinese authorities to support the economy and its people in the time of crisis, the short-term damage is evident. Total retail sales of social consumer goods were down 20.5% in nominal terms on a year-on-year basis in the first two months of 2020. Industrial production dropped, and so did investment in fixed assets. Investment in infrastructure, manufacturing, and real estate development declined by 30.3%, 31.5%, and 16.3%, respectively. The value of exports was down by nearly 16% while imports dropped by 2.4%. China reported its agricultural production as steady.

While a contraction in the first quarter is impending, the magnitude of this loss and time to get back to normal are only calculated guesses at this stage. Having said that, most estimates suggest the intactness of China’s long-term growth.

The National Bureau of Statistics of China states that from a comprehensive perspective, “the impact of the viral disease is short-term, external and manageable. At present, the virus spread has been basically curbed, and the outlook for epidemic prevention and control is getting positive. The people’s basic livelihood is strongly ensured, the overall situation of society is stable, and the economic fundamentals for long-term sound economic development and progressing trend remain unchanged.”

Disclaimer: The author has no position in any stocks mentioned. Investors should consider the above information not as a de facto recommendation, but as an idea for further consideration. The report has been carefully prepared, and any exclusions or errors in reporting are unintentional.

Tony Simon

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