Chinese Q3 GDP took headlines by storm today as the quarter’s 4.9% y/y growth put GDP above pre-pandemic levels. This triggered a bunch of commentary comparing recoveries in China and the West, with the takeaway being that China is winning and the US and Europe would do well to take a few lessons. We think it is worth turning a critical eye on that thesis, particularly because stocks—the ultimate leading indicator—don’t appear to be drawing a similar distinction between China and the US. While pundits focus on COVID-related developments in the here and now, we think markets are looking much further ahead.
As for China itself, the results were overall encouraging. Monthly data showed retail sales and imports back in positive territory year-over-year in September, suggesting domestic consumption is recovering nicely—undercutting widespread fears that the broader recovery is a mirage of infrastructure spending. Even if you don’t own any mainland Chinese stocks, broad growth in the world’s second-largest economy is a plus for global GDP and demand for goods produced elsewhere.
Some commentators took things a little too far, however, in arguing China’s apparently faster rebound 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 pieces 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 officials mandated—and reportedly completed—testing for every last person in Qingdao after discovering 13 cases of local transmission. That is 11 million people. They turned up … zero new cases.[i] That seems like just a bit of a stretch in light of those 13 cases and what researchers have discovered about how the virus spreads over the past 9 months. 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.
We find it rather curious that people are so quick to accept China’s COVID statistics at the same time they are so quick to dismiss the country’s economic data as fudged—a classic you can’t have it both ways scenario. We aren’t going to perpetuate conspiracy theories about Chinese data, but private-sector estimates of the country’s GDP have long diverged from the official reports, and the consensus is that China’s inflation adjustments make GDP growth just a little bit too smooth. Seasonal adjustments add another layer of scrubbing, which is a big reason most analysts flat out ignore the official seasonally adjusted quarter-over-quarter numbers in favor of the unadjusted year-over-year figures. The latter has a backward-looking skew, as a weak year-ago-result can inflate the percentage change, but it is a little more raw.
This is one reason we find comparisons of US and Chinese GDP overall meaningless—the calculations are just too different. But there is another reason we don’t think comparing each country’s results 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, in Q1, and its recovery was similarly accelerated. But the US’s 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. That recovery won’t start showing up in GDP until Q3, months after China’s did. At best, 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. Now, if you take Chinese data at face value, they show a return to pre-pandemic activity is possible. On our shores, some monthly indicators—most notably retail sales—have already achieved that milestone. 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.
Instead, consider what stock markets are likely signaling: Both US and mainland Chinese stocks are back above their pre-pandemic highs and officially in new bull markets. In new bull markets, stocks tend to look to the far end of the 3 – 30 month range they typically price in. Therefore, the return to prior peaks, in our view, is a very good indication that markets see a point, be it a year or two out, when the world is back at normal activity levels and the virus is old news. That both have bounced around since reaching new highs is also fairly typical. The S&P 500 entered a pullback the day after hitting its first new high on a total return basis during the 2009 – 2020. Not overthinking bouncy patches is key to long-term success, in our view, as markets normally break out higher afterward.
[i] “The Latest: China City Finds No New Cases After Testing 11M,” Staff, Associated Press, 10/16/2020.
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