China’s Economy is Bouncing Back—And Gaining Ground on the U.S.

Success in containing Covid-19 is bringing life back to normal and helping close the economic gap with a rival.

By guest author Jonathan Cheng from Wall Street Journal. on Hilsenrath, Grace Zhu and Bingyan Wang contributed to this article.

As the rest of the world struggles to contain the coronavirus, China’s recovery is gaining momentum, positioning it to further close its gap with the U.S. economy.

Across China, restaurants and gyms are busy again. Subway cars and airport departure lounges are packed. Children are preparing to return to classrooms with few of the restrictions U.S. officials say will be hallmarks of post-coronavirus life. In some schools, children are being asked to bring masks—but they do not have to wear them.

With the coronavirus smothered for now, thanks to draconian control measures, J.P. Morgan recently boosted its 2020 China growth forecast to 2.5 % from 1.3 % in April. Economists at the World Bank and elsewhere have also upgraded their forecasts for China, the only major economy expected to grow this year.

That bounceback, while far from China’s heady expansions of past years, should nonetheless help the world’s No. 2 economy move faster in catching up with the U.S., which could shrink by as much as 8.0 % in 2020.

It is also buttressing Beijing’s belief that China’s state-led model, which helped the country navigate the 2008-09 financial crisis with minimal pain, is better than the U.S.’s market system, emboldening Chinese leaders at a time of rising geopolitical competition with the U.S.

China’s inflation-adjusted economic output will likely hit USD 11.9 trillion this year, said Nicholas Lardy, an economist and China expert at the Peterson Institute for International Economics in Washington. That is roughly 70 % of the U.S.’s expected output—a seven-percentage-point increase from last year, and the largest advance China has made on the U.S. in a single year.

Homi Kharas, a senior global economics and development fellow at the Brookings Institution, said the coronavirus puts China’s economy on track to reach parity with the U.S. in 2028 in absolute terms, using current dollars—two years faster than his pre-coronavirus estimate.

The pandemic will also help magnify China’s economic power compared with other developing countries such as Russia and Brazil, said Mr. Kharas, a former World Bank chief Asia economist. India will now likely lose so much ground that its economy will be less than one-fifth the size of China’s by the end of next year.

“China will emerge even stronger as the largest economy in the developing world,” said Mr. Kharas. He added that China will likely come out of the pandemic even more firmly entrenched as Japan—the world’s No. 3 economy, which the International Monetary Fund expects to shrink by 5.8% this year—falls further behind.

China’s recovery remains fragile and warning signs abound, from the threat of double-dip recessions among its trading partners to geopolitical concerns. Many experts remain dubious of China’s economic numbers. Others say its rebound, even if real, is unsustainable.

Daniel Rosen, founding partner of New York-based research firm Rhodium Group, warns of mounting debt in China, uneven growth across the country and festering problems in the banking system. Much of the activity in recent months has been producing things that people aren’t buying, he said, temporarily goosing economic numbers but creating an inventory glut that will weigh on growth later this year.

Mr. Rosen, comparing China to a speed skater that appears poised to pass the U.S. in the inside lane, said that despite the gains, China faces deeper problems: “The skates are cutting into China’s feet, there is bleeding and all they have eaten this year is sugar.”

Even so, the recovery under way is enough to make daily life in China feel significantly better than in much of the West.

Ren Jianmin, a 57-year-old Beijing ride-share driver, said his earnings fell by two-thirds in February and March, when parts of China went into lockdown. He relied on savings to support his family.

Things began turning in April. Mr. Ren said he is now logging 12 hours of steady work each day. That is enough to earn 5000 Yuan (USD 725) each month to supplement his wife’s income as a nurse. His biggest complaint is that Beijing’s notorious traffic jams have returned.

Mr. Ren credits the government’s forceful response to the coronavirus for the turnaround in public confidence, particularly compared with the rest of the world. “The ability of foreign countries to deal with the pandemic is really not good,” he said.

Even in Wuhan, the pandemic’s original epicentre, life is returning to normal, with many residents no longer wearing masks in streets and restaurants filling up again. Images of a DJ hosting a water-park rave party with hundreds of people packed together earlier this month garnered global attention.

Wuhan has not registered any local coronavirus transmissions in three months. Zhao Lijian, a spokesman for China’s Foreign Ministry, said the pool party “reflects a strategic victory achieved by Wuhan and the Chinese government in fighting the virus.”

In the U.S., authorities have warned that a full recovery to pre-Covid ways of life may not be possible, envisioning classrooms, restaurants, concerts and plane flights altered by social-distancing requirements.

But China’s control measures—which include mass testing and widespread surveillance—have made public gatherings and other activities relatively worry-free, as the state inserts itself into citizens’ lives to an extent that would make many Americans recoil.

China’s economic gains are easily explained, said Mr. Lardy of the Peterson Institute: “They did a much more effective job of bringing the coronavirus under control.”

China’s factories were among the world’s first to reopen in April, which helped China grab market share in global trade.

Now, with China’s daily tally of new local coronavirus infections in the single digits, services and retail are climbing back to pre-Covid-19 levels. July retail sales were off just 1.1% from a year earlier.

Companies from Marriott International Inc. and LVMH Moët Hennessy Louis Vuitton SE to Tesla Inc. and Starbucks Corp. reported strong second-quarter growth in China, as the rest of the world pulled back.

Marriott said its occupancy levels in the region reached 60% in the second quarter, not far off last year’s 70% rate.

“The recovery of travel in Greater China demonstrates the resiliency of demand once there is a sense that the virus is better under control,” Marriott chief executive Arne Sorenson told investors this month.

In the Southwestern city of Chengdu, Doris Chen said business at the high-end hotel restaurant where she works has been even better than last year, which she attributed to pent-up demand and increased domestic tourism.

Business first began to recover in May as coronavirus measures were lifted, she said. Before that, authorities only allowed half the number of patrons, and the restaurant’s private rooms were closed because of social-distancing regulations. That is no longer a concern, with the restaurant allowed to operate at full capacity.

Before the coronavirus, Deutsche Bank estimated China’s economy would grow by roughly 26 % between 2019 and 2023, versus 8.5 % for the U.S. over the same period.

Now, taking into account the impact of the pandemic, the bank expects China’s economic expansion to moderate slightly to 24 % between 2019 and 2023, while the U.S. over that stretch will have grown by 3.9 %—less than half the original projection.

China’s growth was originally projected to outperform the eurozone’s by 5.1 percentage points this year, Deutsche Bank said. Now, China is projected to beat the eurozone by twice that margin.

An effective and widely available vaccine could help Western economies get back to their previous growth trajectories faster than expected, said Michael Spencer, Deutsche Bank’s head of Asia-Pacific research. Until then, though, China’s economic gains versus the U.S. could fuel more concerns about Beijing’s emerging clout, he said.

China still faces headwinds. It counts on exports for roughly one-fifth of its economic output, making it reliant on customers in the U.S. and Europe overcoming the virus. It must also prevent its own resurgence in Covid-19 cases.

China’s per capita gross domestic product of USD 10800 a year is far lower than in the West. China came into the coronavirus ranked 71st by this metric, according to the IMF, below Mexico and Thailand.

In the export-oriented southern province of Guangdong, Jason Zhi, a sales manager at a television assembler, said raw materials are becoming more expensive as household appliance demand rebounds, and the yuan is strengthening, which could make Chinese products less competitive overseas.

Mr. Zhi said that while export orders for his 80-employee company, Guangzhou Fuguo Electronics Co., began topping last year’s sales in June, it is still struggling to turn a profit after months of lost sales. “It will be harder for us in the second half of the year,” he said.

Others are more optimistic.

Liu Kaiyan, who runs a 30-room guesthouse near a rafting site in the southwestern province of Guizhou, began seeing business improve in August as families chose destinations where there have been no new coronavirus cases for months.

Reservations have only returned by 50 % compared with last year, she said, and that was after slashing rates to attract customers. Still, she did not lay off any of her three employees, with the prospect of better times ahead.

“Losses are unrecoverable, but luckily we are all safe as the coronavirus is put under control,” said Ms. Liu, who hopes more tourists will come before summer ends.

In Beijing, where gyms closed for several months, a yoga studio operated by Wang Juanli was packed on a recent August day.

She said the business struggled to pay rent and salaries during lockdown, while two nearby gyms went out of business.

Her yoga studio was allowed to resume one-on-one personal training in April. A fresh wave of coronavirus cases in Beijing in June proved temporary, after authorities brought it under control.

New regulations require that she clean and disinfect her classroom before and after every class, and she has to reduce slots for members, given social-distancing orders. Ms. Wang had offered discounts to bring in new customers. Still, she thinks she is on a firmer footing.

“After the pandemic, people have a higher health awareness and realise the importance of keeping fit,” she said.

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