Commentary: The world economy needs more from China

SINGAPORE: China’s post-lockdown rebound is months old and already getting upbraided for its shortcomings. As solid as the economic bounce appears, the fragile world outlook requires more from a country whose stellar run was a feature of global finance in the decades before COVID-19. This recovery will have to work harder - if it can. 

The pickup in growth reported Tuesday (Apr 18) was respectable when dazzling was needed. Gross domestic product rose 4.5 per cent in the first quarter from a year earlier. That exceeded the forecasts of most economists and was impressive compared to the way the economy crawled along for much of 2022; the expansion was 2.9 per cent in October to December 2022, when China finally joined the rest of the world and abruptly ended harsh COVID-19 restrictions.

The rest of the recent data was mixed: Industrial output disappointed, as did public spending, while property investment again sagged. Consumers did spend freely, with retail sales climbing more than 10 per cent. 

But at this rate, growth will stretch to reach the official target of about 5 per cent this year, an objective that was faulted for a lack of ambition as soon as Beijing unveiled it last month.

BEST DAYS OF THE CYCLE

The world’s second-largest economy won’t get much help from abroad. China is finding its feet just as concerns resurface about a recession in the United States, thanks to constraints in credit after the collapse of some regional banks and the effects of rapid monetary tightening by the Federal Reserve.

China will, nonetheless, be the top contributor to global GDP over the next five years, according to the International Monetary Fund. Trading partners and close neighbours would, in turn, love to see more trickle-down from that superlative. 

Let’s be clear: These would still be enviable numbers in any other country of consequence. The downturn during the pandemic was rare for China, while recessions have long been facts of economic life in the US, Europe and Japan.

There were high hopes that this expansion would quickly take off after three years of pandemic restrictions were dismantled. In an ideal world, Beijing would manage to do so without the jump in inflation that’s been so harmful elsewhere.

Some of the bullishness now looks a bit misplaced or, at least, premature. Might we have already seen the best days of the cycle?

China’s manufacturing activity unexpectedly eased in March. Instead of surging, consumer prices are quiescent - they grew only 0.7 per cent in March from the same month in 2022. Factory prices are declining. Rather than being lauded, inflation’s no-show has been attributed to a lack of demand.

That, in turn, has led to calls for a cut in interest rates to support the recovery. Remember that for all the talk of a coming pause in rate hikes in the US, the United Kingdom and the euro zone, their central bankers Jay Powell, Andrew Bailey and Christine Lagarde are miles away from easing borrowing costs.

Nobody wants to go back to the zero-COVID clampdown on business and social life. When the global economy began softening last year, China’s absence from the plus-side of the ledger was notable.

If Beijing could just open and crank up activity, the narrative went, the outlook would get a big boost. The rest of Asia eagerly awaited the lift that could give the region; Southeast Asia in particular anticipated a returning rush of Chinese tourists.

MORE GAINS, PLEASE

There have been some gains, but not enough to compensate for the pessimistic turn in the global economy. Singapore’s central bank, an astute observer of the ebbs and flows of world business cycles, sees China’s revival as being primarily driven by consumption and the benefits largely domestic.

In a note last week that reviewed the reopening, Morgan Stanley was cautious. “Our global economists quantified the spillover of China’s service-led recovery, and found that the boost to global GDP ex-China may be only half of what it has been historically,” the firm wrote. “That said, ‘half’ is not ‘none,’ as was echoed by news over a rebound in luxury sales.’’

LVMH was a leading indicator for one important piece of the picture - its shares rose to a record last week after China powered sales in the first quarter. The Paris-based luxury giant declared itself over the moon about China, while noting a slowdown in its American business. Hermes also reported brisk spending.

Picking apart recoveries and zeroing in on their flaws has long been a sport in advanced economies, even when history remembers them fairly kindly.

Remember the complaints about the US “jobless recovery” after the 2007-2009 debacle? That expansion, frequently derided in its youth, became the longest in American history and was brought to an end in 2020 by the pandemic. Similar gripes were heard in the early 1990s before that upswing grew into an epic boom driven by productivity and dot-com euphoria. 

China now has its turn in the barrel, and it should be educational. There just haven’t been many deep slowdowns to rally from - and for the imperfections of the rebound to be raked over.

Prior to COVID-19, China's GDP hadn't contracted in decades. It’s good to see a comeback, almost regardless of its flavour. But can we just have a little more, please?