Post-COVID-19: China May Face an L-Shaped Economic Recovery

Before COVID-19, China’s economy was expected to grow approximately 5.5% this year, just enough to accomplish its goal of doubling GDP per capita between 2011 and 2020. Considering the current situation, this is going to be difficult to achieve. It’s no surprise that China’s economic growth is slowing amid COVID-19.

China Growth Targets

There’s still debate about whether China will set a growth target for this year. There are three different opinions. One, we stick with the original number of 5.5%, which is close to impossible to achieve. Second, we’ll see a growth target of 3% to 3.5%, which is not entirely impossible if the government launches another massive stimulus package in the second half of this year. The third opinion is that there will be no specific growth target for this year.

The third seems most likely, where China abandons a specific numerical growth target altogether and instead focuses more on high-quality growth, bringing the nation closer to its goal of becoming xiǎokāngshèhuì – the “moderately prosperous society” – by implementing economic policies intended to realize a more equal distribution of wealth.

The International Monetary Fund’s (IMF) official forecast for China’s economic growth this year is 1.2%. China will likely deliver on the higher end of that, somewhere between 1.5 to 2%.

The Resumption of Work

China went into the coronavirus situation about one and a half months earlier than the rest of the world, so it’s coming out of the coronavirus situation one to two months earlier than most other major economies.

China also implemented a strict lockdown policy for the Wuhan province and some other affected cities. That means the rest of China is affected less by the coronavirus situation. As a result, the country is resuming migrant work more quickly than other countries are. Shanghai seems up to 80%-90% back to normal in terms of production and people’s day-to-day life. Beijing appears to have perhaps a 70% resumption of work.

Declining Demand

The bigger concern China faces right now is the sluggish demand from the external world, especially given that U.S. and Europe are still fighting the remainder of the coronavirus situation. China is far more dependent on exports and external economy than India is, at least for now. Workers might be back, but the reduction of demand is having a dampening effect on China’s economy. The plants are up and running again but not receiving as many orders as they were hoping for.

Economic Stimulus

Early on, people were betting heavily on China launching another big wave of stimulus, in both monetary and fiscal policy. However, two months into the end of China’s major coronavirus wave, both domestic and international investors are somewhat disappointed or surprised by the lack of any significant stimulus.

If you count the total size of stimulus packaging relative to the size of the GDP, China actually lags in stimulus size in reaction to the COVID-19 situation. China’s central bank – like many other central banks – is wary about the impact of monetary stimulus, given the quantitative easing occurring in the past decades.

China’s central banks are also somewhat constrained by not just the traditional consideration of inflation but also asset prices in China. China’s housing prices, in absolute terms, are already higher than some of the more developing economies or developed economies. There’s some concern that a further easing on the monetary side could add fuel to the housing bubble.

What’s more, if money were released to the financial sector, we couldn’t know in advance if banks would be willing to pass along liquidity to the real economy, something that’s always a challenge to China’s monetary transmission mechanism. Finally, the People’s Bank of China (PBOC) is very concerned with the renminbi (RMB) exchange rate, which can be a thorny issue, especially in the context of the ongoing U.S.-China trade tension.

In the end, China is averse to doing another massive wave of infrastructure investment. Instead, we emphasize more on the so-called new infrastructure investment, focusing on new energy vehicles, ultra-high voltage charging and upgrades, and infrastructures for artificial intelligence and big data processing centers. All are very promising industries, but then the total size of the stimulus for those would total no more than 4 trillion RMB.

This is no drop in the bucket, but it’s not going to singlehandedly lift China’s economy back to a high growth period. Today, consumption contributes to more than one-half of China’s growth. China’s fiscal stimulus needs to focus more on the consumption side. But this can be both good and bad – good in that consumption is resilient, and bad in that it’s slow. It’s not going to give the economy the big push for growth this year. I don’t foresee a V-shaped rebound. I think, if anything, we’re going to see something like a “L” shape.


About Dr. Ning Zhu

Ning Zhu, Ph.D., is a leading Chinese Economist and Finance expert globally. He is currently Chair Professor and Director of Center for Global Acquisition and Restructuring at PBC School of Finance at Tsinghua University. He is also Deputy Dean for National Institute of Financial Research at Tsinghua. Concurrently, he is Member of the PBOC Monetary Policy Advisory Committee. Other than these, Dr. Zhu is Independent Non-Executive Director at multiple companies, including Molecular Data Inc. (MKD), China Huarong Asset Management Co., Ltd. (2799), Utour Group Co., Ltd. (002707) and China Guangfa Bank.


This article is adapted from the May 21, 2020, GLG teleconference “Post-COVID-19 Economic Recovery in China and India.” If you would like access to this teleconference or would like to speak with Dr. Ning Zhu, or any of our more than 700,000 experts, contact us.

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