China handling the Corona Crisis
When Life gives you Lemons, make Lemonade.
Key Words: China, United States, Pandemic, Gross Domestic Product, National Growth, Exports
Apparently, no other country is going through the Corona Pandemic as well as the People's Republic of China. While countries like the United States suffer tremendous economic losses, it seems like China has not only recovered from the worst, but is back in the black. The Middle Kingdom appears to be unstoppable on its way to becoming the world's largest economy.
But how can a country as diverse as China come through the crisis so successfully- and with record economic growth, too? The answer is found not only in China's strict handling of the virus, but also in its rapid adaptation and optimization. China has in many ways embraced the pandemic and, loosely based on the motto 'When life gives you lemons, make lemonade', turned it into something positive.
After China's economy plunged by 10.7% at the beginning of the pandemic in the first quarter of 2020, it directly rebounded by 12.4% and 3.6% in the second and third quarters, respectively. According to the International Monetary Fund, the observed V shape in the course even suggests that China will return to its usual growth path in the long term. Although the rating agency Moody's expects a decline in sales and profits in the areas of transport, consumption, and tourism again in the coming months, the World Trade Organization is already forecasting growth of 7.9% for the People's Republic in 2021, and a further annual 5.5% for the years following until 2025.
The U.S. seems to have been hit much harder in comparison: In the first two quarters of 2020, U.S. real GDP slumped by 5% and 31.4%. The economy grew relatively weakly in the last quarter of 2020, too. For the year as a whole, a contraction of a full 3.5% could be observed - the first decline since the global economic crisis between 2007 to 2009.While manufacturing and real estate sectors recovered in the final quarter, consumption failed to pick up to pre-COVID levels. Reasons for this might be found in the ongoing Corona restrictions and the tight labor market. In spite of such drastic numbers, consumer spending did increase slightly. However, when compared to the summer of 2020's 41% increase, change was slight, only 2.5%.
So how did the Chinese economy manage to overcome the crisis that smoothly and expand its growth compared to pre-crisis times? The upturn of the second and third quarters of 2020 in China can mainly be attributed to strict restrictions as well as rising exports and public spending.
To start, strict measures and controls were introduced immediately after the first corona cases became known. The country brought the situation under control by Spring 2020, not only by sealing off entire cities and regions, but also through a massive amount of testing. Strict disinfection rules, regular temperature measurements and identity checks are just some examples from the catalogue of rules that Beijing introduced as early as January 2020. In addition, China is one of the first countries in which the use of Corona apps on mobile phones has become widespread. This may not least be due to the fact that the political apparatus has implemented mandatory use. Tough measures and strict controls have strategically promoted the containment of the virus.
"Strict measures and controls [...], sealing off entire cities and regions [...], disinfection rules [...], temperature measurements and identity checks" helped to control the spreading of the virus.
Thus, after the country introduced rules and brought the situation under control in the first quarter, it was able to quickly return to economic growth in the following ones. To this end, the Chinese government implemented a stimulus package amounting to 4.6% of national GDP, not only to strengthen private households and relieve them in terms of tax payments and social security, but also to extend unemployment benefits. This has strengthened national demand for goods and consumption after the initial shock. In addition, the state has maintained its investment in infrastructure and has supported both the healthcare and digital industries with loans. Therefore, unlike its international competitors, China was able to maintain its export business and hardly suffered from bottlenecks. The country's ability to supply remained intact.
"As global demand for technological equipment increased against the backdrop of the rising proportion of home office workers as of March 2020, demand, and thus China's export share, increased at the same rate."
According to the WTO, in 2020 China was one of the only countries besides Thailand that was able to expand its exports, especially merchandise trade, and did not have to post negative figures. The reason for this can be understood once China's export structure becomes clearer. The country mainly bases its exports on the production of technological parts equipment. These include computer and mobile phone screens, circuits, and office technologies. As global demand for technological equipment increased against the backdrop of the rising proportion of home office workers as of March 2020, demand, and thus China's export share, increased at the same rate. Around 20% of all exports came from this sector in 2020. In addition, a large part of medical materials (e. g. masks, protective suits, syringes and other medical supplies) were produced and exported in China. With the ever-increasing number of corona infected people in the world, China was able to sell more and more exports.
To close the Crisis chapter and to get the country back on its feet after the first economic slump in the Spring of 2020, China's leaders incurred massive debt and continuously invested in infrastructure projects, digitalization, and health. Nevertheless, not only is China's sovereign debt burden a source of concern for experts, but retail sales growth remains relatively low. So even if China's recovery seems fragile and the question of economic sustainability remains unanswered, China has managed to do what all other G20 countries have failed to do in 2020: achieve a positive growth rate. China's share of the world's gross national product will consequently increase, and the global economy will change in its favor. China has indeed - or so it seems at present - successfully prepared lemonade from the given lemons, and is now selling it on the global market.
Laura M. Detels