Ideasroom

Will China’s economy continue to bounce back?

China has avoided a recession for now, but it remains to be seen whether its economy will continue to bounce back as the Covid-19 pandemic continues to ravage the globe.

The announcement by the National Bureau of Statistics of China (NBS) on July 16 shows the Chinese economy grew by 3.2 percent in the second quarter of 2020 compared to a year ago, rebounding from the Covid-19 pandemic.

This is a sharp reversal from a first quarter contraction of 6.8 percent. It also means China has avoided experiencing two consecutive periods of negative growth - an indicator of entering a recession.

Source: OECD Quarterly National Accounts

China’s bounce-back is important, as many other countries in the region and in the world will report contractions in the second quarter of 2020.

Singapore, for example, has entered a recession with two consecutive quarters of contraction. On a quarter-on-quarter seasonally-adjusted annualised basis, Singapore shrank by more than 40 percent in the second quarter of 2020.

According to the official statement of the NBS, “the national economy overcame the adverse impact of the epidemic in the first half gradually and demonstrated a momentum of restorative growth and gradual recovery, further manifesting its development resilience and vitality”.

The statement says agricultural production grew by 3.8 percent in the entire first half of 2020, industrial production recovered quickly and market sales were gradually improved.

Online retail sales rose 14.3 percent, up from the previous quarter’s 5.9 percent. 

There are, however, some doubts on the official GDP statistics.

Derek Scissors, a resident scholar at the American Enterprises Institute in Washington, wrote “No, China didn’t grow in the second quarter”.

He argues most businesses were not operating at full strength - for example, China reported a 1.9 percent expansion in the total value added of the service sector for the second quarter from a year earlier.

Scissors argues that “at the end of June, 10 percent of services firms hadn’t even restarted, making no contribution at all”.

We will see whether there will be any significant revisions for the second quarter growth rates for China in the upcoming quarters.

Nevertheless, China’s positive growth rate in the second quarter of 2020 looks real and plausible.

The reliability of China’s economic data has been questioned since the 1980s.

Chinese statistical authorities collect price level statistics used to generate GDP deflators, however most private enterprises also separately collect the same statistics.

There have been inconsistencies between the official statistics, and those reported by enterprises.

If you choose the 'right' price deflator, you can generate a productivity and growth boom. Many argued that was the case in the beginning of the economic reforms in China.

Following the reform and the opening up of the economy, China gradually introduced the United Nations System of National Accounts (SNA) used by countries that adopted the market economy system.

It has been gradually adopting international standards in the compilation of its statistics.

Approved by the central government, the first national economic census was undertaken in 2004, which was a very important step as the NBS improved the methods of estimation and the quality of data.

In 2011 the NBS brought China’s GDP data closer to international standards, publishing seasonally adjusted quarter-by-quarter growth figures.

With these data, cross-country comparisons for the short-run statistics have become more meaningful.

Surely, considering the size of the economy, China needs further revisions and developments in data quality.

Since the outbreak of Covid-19, the International Monetary Fund (IMF) has issued its World Economic Outlook twice, in April and again in June.

On April 6, the IMF released its 'World Economic Outlook, April 2020: The Great Lockdown' report (and the associated data), with the global economy projected to contract by 3 percent in 2020.

It then released the World Economic Outlook Update for June, which projects the global economy will contract by 4.9 percent this year over Covid-19. This is a major revision of the forecasts.

According to the World Economic Outlook Update for June, China will grow only 1 percent in 2020.

This is a significantly low figure, however the prospect for China is still better than other major economies like the United States, Germany, and Japan which will contract by 8 percent, 7.8 percent, and 5.8 percent, respectively.

Again, these are just forecasts based on the current state of the globe.

With the help of the announced second quarter growth rate, China can achieve more than 1 percent GDP growth for 2020.

Accordingly, it is very likely to see another set of revised forecasts from the IMF and other international organisations.

The pandemic is still developing across the globe and the uncertainty is getting larger.

Melbourne’s second lockdown in response to a spike in new coronavirus infections shows the danger is still out there and negative economic effects of the pandemic could get worse for many countries.

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