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The dragon fedges again

China was the first country to respond to the Corona pandemic with a comprehensive “lockdown.” The resulting economic crisis hit Chinese society with full force. Because of the pandemic, the Chinese economy has been subjected to a massive burden.

In the first three months of the year, the world’s second-largest economy had to deal with a historic slump in economic activity of 6.8% of national product. For the first time since official records began in 1992, China recorded negative economic growth in the first quarter. In the second quarter, the economy recovered by 3.2% compared to the previous year. Signs are mounting that the Chinese economy is recovering faster than previously expected.

The Chinese economy has withstood the Covid-19 pandemic, according to the Chinese government’s assessment. The stable and long-term good basis of the economy remained unchanged and the economy returned to a stable trend. According to many international institutions, China will also be the only major economy with positive growth in 2020.

Through joint efforts by the whole country, China has succeeded in effectively controlling the epidemic and encouraging the resumption of production in time, so that the economy could be revived. Adam Posen, director of the Peterson Institute for International Economics in the US, points out that the Chinese government has taken timely action, particularly in the area of public health, to respond to the epidemic. This is the key to a rapid economic recovery.

However, the Covid 19 epidemic is still spreading around the world, so risks and challenges remain for the People’s Republic as well. The main indicators of China’s economic growth, in particular production, services, consumption, and investment, are still declining. There is still a lot of hard work to be done before a return to normality.

This is another reason why, as Chinese President Xi Jinping emphasized in a letter to the Global CEO Council, the country will push ahead with reforms and opening up, as well as providing a positive business environment for investment for Chinese and foreign companies alike, and opening up new opportunities and prospects for them.

The Dragon hisses again

The People’s Republic is not yet over the mountain. Growth is still upforable for Chinese conditions, but there is no longer a minus of the GDP figure for the second quarter. There are hardly any new infections today, life and economic activities are returning to normal. The upswing is driven by domestic demand and a resurgence in industrial production and services.

Industrial value added fell by only 1.3% year-on-year, while investment in property, plant and equipment fell by 3.1% to 28.16 yuan, according to the National Bureau of Statistics (NBS). The unemployment rate stood at 5.7% in June, a 0.2 percentage point decrease from May. This also puts China in a better position than most countries in the world, as a total of 1.6 billion unemployed were reported by the International Labour Organisation (ILO).

“Performance in the second quarter was better than expected as supply-side production picked up and investment picked up. The economy shifted from a post-virus recovery to a periodic increase to a certain degree in the second half of the second quarter,” said Tian Yun, deputy director of the Beijing Economic Operation Association. Retail sales fell 1.8% in June from a year earlier, after falling 2.8% in May. Industrial value added rose by 4.8%, re-growth for the third month in a row.

Exports and imports were up again for the first time in June. Exports in the US dollar rose by 0.5% compared to the same period of the previous year, but had to put away a 6.6% decline in the first half of the year. Imports of raw materials in particular increased strongly in June. Iron ore imports stood out, with the biggest increase in 33 months.

Crude oil imports also increased significantly. Imports from the US climbed 11.3% after falling by double digits in the wake of the Corona crisis. Foreign trade increased by 15% in June. In fact, experts had expected a sharp decline in imports as in previous months. China’s customs spokesman Li Kuiwen called the development of foreign trade in the first half of the year “better than expected.” After the turbulence in the first quarter, imports and exports in the second quarter showed “signs of recovery and stability”. At the same time, however, the spokesman warned of “a bleak and complicated situation in the second half of the year”.

Despite the improvement, China’s economy must continue to adapt to hard-to-calculate risks: uncertainties caused by US-China trade and technology disputes, and a possible further decline in the global economy. The risk of a new Corona wave is also not excluded. And it is not yet clear what impact the massive flooding along the Yangse River in central China will have.

Nevertheless, thanks to China’s positive economic figures, the International Monetary Fund (IMF) also sees the global economy on the rise after the unprecedented collapse in the Corona crisis. However, a second wave of infections could lead to further setbacks, warned IMF chief Kristalina Georgieva: “We are not out of the woods yet.” Thus, the international trade in goods in the euro zone is still suffering considerably from the effects of the virus crisis: according to initial estimates, the currency area’s exports to the rest of the world in May were EUR 143.3 billion – a decrease of 29.5% compared to the same month last year.

Especially in the USA, the situation is getting worse with tens of thousands of new infections per day: “We did not expect the second wave to roll so massively in the USA six weeks ago,” said Gabriel Felbermayr, head of the Kiel-based research institute IfW, which is why the export-oriented German economy is feeling “significant headwinds” – also because emerging economies such as Brazil, India or South Africa are massively affected.

However, the most recent data from China are a small “bright spot”. For the economist Bastian Hepperle, the People’s Republic has made up for much of the coronal economic downturn: “The Chinese dragon is fuming again.” But in his opinion, it will not continue as vigorously as in the second quarter: private consumption and global demand are slowing down. In the second quarter, the development was mainly determined by catch-up effects.

But foreign demand for Chinese goods also made the recovery possible in the spring: “But there may not be any real joy in the figures.” Because the retail data for June showed that not all sectors of the economy felt an equal upswing. Retail sales fell 1.8% year-on-year, slumping for the fifth month in a row.

Experts expect the economic recovery to continue and intensify, although it remains uncertain how the Chinese economy will develop in the second half of the year. The renewed Covid 19 outbreak in Beijing a few weeks ago has highlighted how fragile the situation is. The continuing uncertainty – including in income and job security – is putting pressure on consumer behaviour, and many, especially small and medium-sized enterprises, are struggling to survive.

Commenting on the development, British China expert Martin Jacques said: “This rate of economic growth is very encouraging. We know that China’s economic growth slowed by 6.8% year-on-year in the first quarter and has now grown by 3.2% in the second quarter. This means that China has, astonishingly, avoided a recession. This figure strongly reflects the resilience and energy of the Chinese economy. Just as China has successfully defeated the Covid 19 pandemic, the rapid economic recovery sends the same clear message that the Chinese government has strong government capabilities.”

The government had responded to the Corona crisis with a comprehensive stimulus program to support domestic demand. It pumped hundreds of billions into the domestic economy to alleviate corona-related record losses in export trade and mitigate the consequences of its own corona"shutdowns. It suspended taxes and facilitated access to credit, distributed vouchers for shopping and food. It helped the car industry with e-car premiums and relief for incinerators and set up an infrastructure program that is intended to massively advance the expansion of the superfast 5G mobile network.

With the promise to create nine million jobs in cities, it is also spreading optimism, especially in the economic division of the state-owned china daily newspaper China Daily. This is matched by the news that China’s Vice Premier Liu He wants to see many positive signals in his country’s economic development, without giving any specifics.

Already at the National People’s Congress, the party and state leadership of the People’s Republic deviated from its previous practice and did not set a growth target “because of the great uncertainties” caused by the Corona crisis. It was already known that China’s economy had slumped in the first three months of this year at the same level as it had not in 28 years. Even now, the leadership is silent about the further development. Instead of officially ending poverty this year, as envisaged by the head of state, the country is in danger of being hit by a setback in its socio-political objective.

Economist Aidan Yao of Axa Investment Manager warned of the threat of mass unemployment. His company had determined that up to 80 million people in China were out of work during the shutdown. “China must act quickly,” he concluded in early May in hong Kong’s South China Morning Post newspaper.

Until recently, the party and state leadership had very different plans: the nation, strictly governed and controlled by the Communist Party, moved up inexorably for many years. Growth rates in the high single-digit to low double-digit percentage range helped tens of millions of Chinese out of poverty, created the world’s largest middle class, made China a leader worldwide in promising industries from mobile communications to mobility. It seemed only a matter of time before the country, with its 1.4 billion people, would catch up and trump its worst rival, the United States. With the Corona pandemic, these ambitious plans for the future have been clouded.

Long before Europe, China had eased again, declaring the coronavirus to be defeated – perhaps too soon. Another Corona outbreak at a wholesale market has caused problems for the capital Beijing. Again, schools and kindergartens had to close on site. Again, residential areas were cordoned off. Again, the economy is suffering.

The crisis as a whole hit China in the midst of upheaval. Even before Corona, the country struggled with weakening growth, customs conflicts with the US and homegrown problems depressed sentiment: a bloated state economy and a lack of competition. And, because China’s economy is globally interconnected, a stable development is unlikely to be achieved until the global economy as a whole picks up again.

The Chinese economy has become an important driver of the global economy since the international financial crisis in 2008, points out the expert Martin Jacques, who has already been quoted. And he argues that, after the Covid-19 pandemic, the world’s economic landscape is changing dramatically once again, and that China’s role in the global economy is becoming increasingly important. The center of the global economy will gradually shift from the US to China. “Of course we will wait and watch the process, but I would bet that this will definitely happen.”

In this respect, the optimism of the party and state leadership as a whole does not seem unfounded. China’s economy could grow by as much as 3%, estimated Zhang Ming, a researcher at the state-run Chinese Academy of Sciences. If this happens, China could follow the target set so far next year.

At the very least, China is better able to cope with the pandemic and the consequences of the crisis than many other countries, and especially the former world power, the United States. How well governments can stem the spread of the pandemic has become an important factor in assessing economic development. Globally, there are big differences.

The US, under the chaotic leadership of the Trump administration, is a negative example, and even six months after the first infections became known, it is failing to take effective countermeasures across the board. The contrast between the US and China could not be greater: the number of daily reported new infections in the country of 1.4 billion inhabitants has been in the single digits since the beginning of July, with one exception. The figures in the US, on the other hand, are still exploding.

Europe has not yet controlled the spread of the coronavirus to the same extent as China, but is in a much better position than the US. Thanks to a stringent containment strategy at the start of the pandemic, the continent’s economies are recovering on a more solid footing. However, it is likely to remain difficult in Western economies for the time being. Europe is not expected to reach pre-crisis GDP levels until the end of 2022/23.