The latest numbers on China’s economy are encouraging for two reasons. One is that forward-looking indicators suggest it is poised to speed up. Second, China’s recovery now appears strong enough to boost imports from the rest of the world, especially Asia.
Having put the pandemic firmly behind it, the economy is normalising rapidly. Restrictions on economic activity have been largely relaxed and consumers are regaining the confidence to return to their normal activities (except for overseas travel).
GDP growth was a healthy 4.9% year on year in the third quarter, strongly up from 3.2% in the previous quarter, and putting economic output for the year to date at 0.7% above the year-ago level. The Chinese economy has now made up all the lost ground in the first few months of this year when the pandemic was raging.
The underlying trends are also encouraging as they show demand catching up with the earlier recovery in production capacity. Indeed, consumer spending was much stronger than expected, with retail sales up 3.3% year on year in September, compared with just 0.5% in August. This is likely to be sustainable as household disposable incomes are expanding again. That explains why Chinese consumers are once again happy to buy big ticket items such as cars (car sales were up 11.2% year on year in September).
Also noteworthy is the recovery in fixed asset investment, the single biggest driver of Chinese growth, which in September was 0.8% higher than the year before. Infrastructure spending maintained good momentum – an important factor as it will boost demand for commodities that Asian economies, among others, export to China.
The pass-through from Chinese import demand to the rest of the world has been robust and broad
There are other positive indications that the economy is well positioned to expand even faster in coming quarters:
- First, monetary stimulus is feeding through to the broader economy. Credit demand is picking up, reflecting a growing appetite for loans to fund business expansion. New local currency loans rose by about a third between August and September, as corporates sought more of the medium/long-term loans typically used to finance investment. This monetary expansion will exert a powerful stimulus on economic growth in coming quarters.
- Second, policy actions will continue to boost the economy. While the central bank is likely to calibrate monetary growth more carefully so as to avoid financial risks, the government is preparing to announce the outlines of its 14th five-year plan. Once the private sector has clarity on the economic strategy for the coming years, a further surge in business investment is likely.
- Third, China’s export engine has been strengthening despite concerns that the global economy would be set back as a result of new infection surges in the US and Europe. Exports of items the world needs as a result of the pandemic are surging – medical equipment, personal protective equipment and work-from-home exports such as computers.
Chinese demand is now feeding through to draw in exports from trading partners.
The jump in Chinese imports in September was due principally to stronger domestic demand and the stockpiling of semiconductors, whose import spiked by 17.6% (year on year) likely reflecting rushed purchases before US trade restrictions on China kicked in. However, the import recovery goes beyond this one-off factor. Other imports that are sensitive to the economic cycle also rebounded such as copper and iron ore, both reflecting the infrastructure buildout and reflation in the property market.
It is also worth highlighting that the pass-through from Chinese import demand to the rest of the world has been robust and broad. Imports from the US jumped by 24.8% (year on year) in September, while imports from ASEAN expanded 13.2% and imports from Europe and Japan also showed vibrancy.
China now represents about 18% of the world economy, about double the share before the global financial crisis of 2008. Recovery in China consequently has a more powerful positive impact on the rest of the world than ever. With China’s economy likely to gain even more momentum as we head into the next year, the rest of the world will enjoy the impact in terms of stronger demand for their exports and higher prices for their commodities.