China’s economic recovery continues as consumer sentiment and manufacturing rebound

The world's second-largest economy grew by 4.9% in the third quarter, compared with a year ago, eclipsing a 3.2% expansion in the second quarter

A shopping mall in Beijing. China’s economic growth picked up pace as a shaky recovery from the coronavirus pandemic gathered strength. AP

China’s economy continued to recover from the depths plumbed during the Covid-19 pandemic, providing support for a world economy suffering its deepest recession since the Great Depression.

Gross domestic product rose by 4.9 per cent in the third quarter from a year ago, according to data released in Beijing yesterday. That is lower than what economists forecast, but greater than the 3.2 per cent expansion recorded in the second quarter.

Retail sales expanded by 3.3 per cent in September, industrial production grew by 6.9 per cent in the month and investment growth rose by 0.8 per cent in the nine months to the end of the quarter.

Despite the weaker-than-expected gross domestic product performance, output has expanded by 0.7 per cent this year, meaning that the world’s second-largest economy regained all the ground it lost in the first half.

Strong import growth in the third quarter may have dented the GDP number while still being a positive sign for overall output.

While Chinese stocks pared gains after the data, they remained above Friday’s close. The yuan was little changed, despite briefly hitting its strongest level since April 2019 as onshore trading began yesterday.

Underpinning the recovery has been an aggressive containment of the deadly coronavirus that has allowed factories to quickly reopen and capitalise on a global rush for medical equipment and remote-working technology – a dynamic that helped exporters win record market share in the seven months to July.

“One of the reasons that headline GDP missed expectations is probably a strong rebound in imports, which contributes negatively to GDP,” said Liu Peiqian, China economist at NatWest Markets in Singapore.

“That should not be viewed negatively, as strong growth in imports reflected [that a] recovery in underlying economic growth is strengthening.”

Shoppers have been more cautious, but robust spending through the recent Golden Week holidays suggest they too are beginning to open their wallets again.

“China’s recovery remains intact, even with a slower-than-anticipated pick-up in [third-quarter] GDP growth,” said Chang Shu, Bloomberg's chief economist for Asia.

“The undershoot was caused by a service sector still struggling to shake off the virus impact. But the manufacturing sector leapt back to pre-pandemic levels of growth.”

The recovery has come with relatively restrained government borrowing and central bank easing compared to China’s peers. Instead, the government has focused on targeted support for business, a contrast to how it responded to the global financial crisis.

“China is supporting the world in a different way from what it did after 2008,” said Shen Jianguang, chief economist of e-commerce company JD.com.

“A slowing economy means it could not afford another stimulus in 2020. Instead, it did its job by serving as the ‘supplier of last resort'.”

Central bank governor Yi Gang said on Sunday that China has “proactive fiscal policy” and “an accommodative monetary policy to support the economy”.

“Right now, China has basically put Covid-19 under control,” Mr Yi said in a webinar organised by the Group of 30, an international body of leading financiers and academics.

“In general, the Chinese economy remains resilient with great potential. Continued recovery is anticipated, which will benefit the global economy.”

Analysis of International Monetary Fund data shows that the proportion of worldwide growth coming from China is expected to increase from 26.8 per cent in 2021 to 27.7 per cent in 2025, according to Bloomberg calculations.

The fund said Chinese growth is the only reason it expects global output to be 0.6 per cent higher by the end of 2021, compared with the end of 2019.

However, the recovery is not without its holes. The economy was only 0.7 per cent bigger in the nine months through to September than it was during the same period in 2019. The government expected full-year growth of about 6 per cent at the beginning of the year.

Furthermore, consumers have been slow to spend as they once did. Even with the virus under control, shoppers have spent about 9 per cent less in the first eight months of the year compared to the same period in 2019.

It is also unclear how durable the recovery will be, given the domestic pressures from unemployment and rising corporate and household debt. China Evergrande Group, the world’s most indebted developer, has rattled investors amid fears for its financial health.

Much will also depend on how relations with the US evolve after the presidential election in November. Any worsening of trade tensions could throw a spanner in the works for export revival.

At the same time, the resurgence of the virus in Europe and the US will complicate the global rebound and could impair China’s own recovery.

Putting the economy quickly back on its feet is crucial to China’s global ambitions. They were hammered home last week by President Xi Jinping during a tour of technology hub Shenzhen, where he stressed the need to take the global lead in technology and other strategic industries.

Urging an “unswerving” commitment to technological innovation in a period of “changes unseen in a century”, Mr Xi again promoted a need to become more self reliant, a policy that is expected to be a central part of a new five-year economic plan that will be discussed at a Communist Party gathering expected later this month.

That focus on driving growth in new economy sectors such as consumption, technology and services means investment there is outstripping that in old sectors, making this cycle different from the credit and construction boom after 2008, noted Cui Li, head of macro research at CCB International Holdings in Hong Kong.

“An industrial cycle led by the economic upgrade and the absence of a large credit expansion will make this growth recovery more sustainable,” she said. “The Chinese recovery will sustain.”