China GDP Growth Surpasses Expectations

Jacob Hess

January 19, 2021

• China
• GDP

The highlight of the week so far has been the recent GDP news out of China. The Asian giant released its figures for the end of the year and stunned the world. According to the Chinese government, its country saw GDP growth of 6.5% in Q4 completing the year strong and achieving annual growth of 2.3% for the year. The positive growth outpaces most if not all major economies including the United States and the Eurozone economies which are likely headed for negative year-on-year growth in 2020.

The marquee World Economic Outlook noted the development of a quick recovery in economic growth in China that was "faster than expected" in its October Update of the report. China seemed to be an exception to the greater economic downtrend (as visualized by the chart of industrial production) and the report made sure to point that out. However, it also suggested there were obstacles to achieving pre-pandemic GDP levels. In the end, the international financial organization just missed its China 2020 GDP growth projection of 1.9% by 0.4% (it's worth noting the IMF's April projection was 1.2% and June projection was 1.0%).

The Chinese outperformance wasn't due to the amount of financial support its central bank and its government provided to the economy. Deficit spending was only allowed to rise from 2.8% of GDP to 3.6% of GDP. While it did set a record high for the nation, it was nothing close to the US 2020 budget deficit of 14.9% of GDP, up from 4.6% of GDP, estimated by the CBO. This included a fiscal stimulus bill put forth by Beijing in May 2020 worth about $500 billion, a much smaller price tag than the $3 trillion that the US put forth. Spending in the European Union has outpaced China as well with an estimate of 16% of EU GDP in spending on liquidity support including a recent relief package worth about $655 billion.

Instead, China's outperformance appears to have been due to its success in suppressing the spread of COVID-19 with strict lockdown procedures which included lockdowns of entire apartment buildings and even cities when an outbreak started. China could also rely on its citizen's mindfulness of public health which includes familiarity with face masks. According to official data, China has seen only 71 cases per 1 million people, compared to the world average of 12,583 cases per 1 million people, and only 34 deaths per 1 million people, compared to the world average of 2,686 deaths per 1 million people. These numbers are better than most African nations and island nations (which are arguably easier to lockdown and quarantine) like New Zealand, Australia, and Cuba.

Evidence of a strong recovery and a successful repellant of COVID-19 can be found in trade data. In particular, there is evidence of strength in steel production data since China supplies over 50% of global steel. According to a FAS report, Chinese steel production increased 4.5% in the first 3 quarters of 2020 over the first 3 quarters of 2019. In the same period, steel production fell double-digits in the EU, North America, India, and Japan. China also imported 7.3% more crude oil in 2020 at a rate of 10.85 million barrels a day and set a record in LNG imports in December 2020 at over 9 million tons.

There is a sizeable amount of skepticism in China's numbers, both economic and COVID-19 cases, that has stemmed from confusion in China's cooperation with the World Health Organization and the general opacity in which its data is released. However, there is also evidence to support the positive numbers as well. In fact, skeptics are likely biased by their own understanding of the virus the pandemic which has brought a whirlwind of disease and death to most developed nations in the world. There is no doubt that the Chinese economy has proven to be resilient in the past with an economy that has continued to beat expectations. And as a citizen of the global economy, that should be seen as a sign of hope that the world can bounce back too not just because of the interconnectedness of economies but because it can provide a blueprint back for the rest of the world to follow.