China's economy was first in to COVID crisis – and is first out

By its own standards, China’s economy is having a bad year. After four decades of stellar growth, the East Asian country will barely expand at all in 2020.

But just about every country – big or small – has faced a hit from the COVID-19 pandemic, and China has suffered less than most. Whereas most western industrialized nations are still struggling to get back to where they were before the virus struck, Beijing has reported that there was year-on-year growth in the third quarter.

Financial analysts tend to take China’s growth figures with a pinch of salt but even so it is clear that the world’s second biggest economy has been leading the way in the recovery from COVID-19. There are a number of reasons for that.

The first is that China experienced most of its economic contraction in the first three months of the year, whereas most other countries felt the maximum amount of pain in the second quarter. Having been first into recession, China was first out.

That process was helped by a second factor – the speed with which Beijing acted once it admitted that it was facing a serious problem. China, like many other countries in the region, knew what to do after previous health scares and its lockdown was brutally effective.

As in the rest of the world, curbs on activity were matched by measures to soften the economic blow. China increased public investment to offset weak private sector capital spending.

So, when the rest of the world eased restrictions in the spring, China’s manufacturing sector came back to life, anticipating rising export demand.

The second wave of infections in the west means that exports have not been as strong as expected and stockpiles of goods have built up. There is a risk that growth will soften in coming months if these inventories are run down to meet demand.

On the other hand, the lack of any second wave within China has helped support consumer spending. Beijing will be encouraged that annual growth of retail sales picked up from 0.5% to 3.3% in September, and by signs of a return by migrant workers to urban areas, something that was not possible due to the lockdown restrictions earlier in the year.

In recent years, China’s leaders have actively sought to diversify the economy so that it is less dependent on exports. That policy now seems to be paying off.