China – the bubble that never pops

2020 will go down in history as a year of momentous change – a year in which some pre-existing trends such as digitalization gained pace, while others like globalization actually seemed to go into reverse. It will also be remembered as a period when we saw the re-emergence of unilateralism or protectionist tendencies in some areas. And, of course, new developments such as the sudden, large-scale switch to home working may be here to stay in one form or another.

Recent data suggest that one of the pre-existing trends that has been reinforced in 2020 is the importance of China for global economic growth. To the frustration of many in the West, China has recovered from the Covid-19 outbreak far more swiftly and successfully than other major economies. In fact, the Chinese economy grew by 4.9% in the third quarter of 2020 according to government data. This year-on-year increase represents a dramatic turnaround from the first quarter, when the economy contracted by 6.8%, and marks a further acceleration from the 3.2% rate of expansion in the second quarter. With its economy picking up steam, it now appears likely that China will be one of only a small number of countries – and potentially the only G20 nation – to record positive real GDP growth for the current year.

World GDP growth forecasts for 2020
 

Interestingly, this follows many years in which the robustness of the Chinese economy was questioned by some observers. It is also worth noting that back in 2007, China’s Premier Wen Jiabao commented that “the biggest problem with China’s economy is that growth is unstable, unbalanced, uncoordinated and unsustainable”. And yet China not only demonstrated remarkable resilience in the face of the 2007/2008 global financial crisis but has, in 2020, once again displayed an impressive ability to bounce back from severe challenges and remain on course for growth.

Perhaps most crucially: China has avoided a widely anticipated real estate crash that many feared would materialize on the back of excess leverage. The country has also reduced its excessive current account surplus, which is now close to balance. And inflation has remained well controlled and the currency has been stable.

In short, given the pressures and pitfalls the country had to navigate in 2020, China really does appear to be “the bubble that never pops” – to quote Thomas Orik, Chief Economist at Bloomberg. Bubbles can persist when an economy’s nominal growth rate (taking account of real growth and inflation) consistently exceeds its nominal interest rate. That is the case for China today and it has been for many years – and this growth looks set to continue in the future.

With the IMF predicting that the global economy could contract by as much as 4.4% in 2020 – the sharpest downturn since the Great Depression – the resilience and vast potential of the Chinese economy now appear more important than ever, given its role as an engine of economic growth that could help spur the global recovery.

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