Chinese Economic Output Regains Pre-Pandemic High

Whilst some financial commentators argue China’s swift economic recovery means it is stronger than the US and Europe, we think it is more of a preview of what investors can expect from developed-world data.

Chinese Q3 gross domestic product (GDP, a government-produced measure of economic output) took financial news headlines by storm Monday as the quarter’s 4.9% y/y growth put GDP above pre-pandemic levels.[i] We encountered many articles comparing recoveries in China and the West, with a common takeaway being that China is winning and the US and Europe would do well to take a few lessons from its handling of the pandemic. We think it is worth turning a critical eye on that thesis, and in our view, a proper comparison suggests China’s experience is more of a preview for Europe and the US than a sign of economic superiority.

As for China itself, the results were overall positive, in our view. Monthly data showed retail sales and imports back in positive territory on a year-over-year growth rate basis in September, suggesting domestic consumption is recovering nicely—undercutting widespread warnings that the broader recovery is a mirage of government spending on infrastructure.[ii] Even if you don’t own shares of any mainland Chinese companies, broad growth in the world’s second-largest economy is a plus for global GDP and demand for goods produced elsewhere.[iii]

Some commentators argued China’s apparently faster rebound than Europe and America’s is a product of unique success in staving off COVID-19. We think this is a stretch on a couple of fronts. One, we saw numerous articles arguing the country has avoided a second wave. That may be true as far as the official numbers are concerned, but we think this strains credulity. For instance, last week Chinese officials mandated—and reportedly completed—testing for every last person in the coastal city of Qingdao after discovering 13 cases of local transmission. That is 11 million people. They turned up … zero new cases.[iv] That seems like just a bit of a stretch in light of those 13 cases and what researchers globally have discovered about how the virus spreads over the past 9 months (as documented in numerous scientific publications). We aren’t saying it is impossible, just highly improbable. Particularly when the international medical community has warned for months that virus data from China are suspect given the regime’s well-documented lack of transparency.[v]

The second reason we don’t think comparing China’s GDP results with Europe and the US in a given quarter makes sense during the pandemic: The timelines are different. The virus originated in Wuhan, China and triggered lockdowns there about two months before the US and Europe began shutting down en masse. China started reopening when lockdowns in the West were at their worst. So China’s GDP contraction arrived earlier, and its recovery was similarly accelerated. In Europe and the US, many monthly indicators suggest contraction began in March and really got going in Q2, and reopening didn’t allow a recovery to get underway until late in that quarter.[vi] Based on monthly data from July, August and September, that recovery won’t start showing up in European and US GDP until Q3, months after China’s did.[vii] At best, we think China’s path is a hint at what to anticipate in a general sense for the developed world and Europe. As lockdowns here wrecked activity, China’s nascent recovery earlier this year offered a beacon of hope that growth could return as businesses reopened. That indeed happened.[viii] Now, Chinese data show a return to pre-pandemic levels of activity is possible. If you want to look to China as evidence that the broader economy can also catch up, then by all means, have at it. But we would caution against reading much more into the data.

[i] Source: FactSet, as of 19/10/2020.

[ii] Ibid.

[iii] Source: World Bank, as of 19/10/2020. Statement based on annual national GDP in US dollars.

[iv] “The Latest: China City Finds No New Cases After Testing 11M,” Staff, Associated Press, 10/16/2020.

[v] “Coronavirus: Why China’s Claims of Success Raise Eyebrows,” Staff, BBC News, 7/4/2020.

[vi] See Note i.

[vii] Ibid.

[viii] Ibid.

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