China's Economic Strength to Continue Into 2021

China was the first country to suffer from the coronavirus, but it recovered in time to have its manufacturing capacity up and running as the virus spread across the globe. The demand for personal protective equipment (PPE), computers, and everything else helped power China's economic recovery in 2020 and position the country to continue its strong growth into 2021. We'll look at how this happened and what it means for the market.

Key Takeaways

  • China has snapped back from a plunge early in the year to post modest growth throughout 2020.
  • This rapid recovery leads the major economies and owes heavily to China getting its manufacturing sector back up and running as other countries went offline.
  • China's economy is projected to expand even more in 2021 as coronavirus demand continues while other major economies continue to struggle with the virus.

An Incredible Comeback

While the other major economies in the world ended 2020 still grappling with the coronavirus and shuttering segments of the economy to prevent further spread, China's economy expanded 2.3% in 2020. This comes at a time when the World Bank projects that most economies are destined for years of muted growth following a significant decline in real terms in 2020.

China's 2.3% overall growth is more impressive when seen in context. China's gross domestic product (GDP) contracted 6.8% in the first quarter, increased by 3.2% in the second quarter, increased again by 4.9% in the third quarter, and then ended the year by surging 6.5% in the fourth quarter. Although the virus knocked China's economy off its rapid growth, resulting in a year in which its overall growth fell below its own standards, the successive increases within 2020 have essentially brought China back to its pre-pandemic position faster than any other nation.

The reasons behind this rapid snapback owe less to the stimulus propping up many of the other large economies and more to the fact that China was able to get its factories up and running. As the coronavirus spread across the globe, manufacturing capacity and supply chains outside China started to fall apart. This cemented China's role as the manufacturing floor of the world as it was able to churn out PPE and other finished goods on the strength of domestic supply chains and capacity. Put simply, when demand was at its highest for certain products, the only consistent suppliers were based in China.

The Outlook for 2021

Growth prospects for China going into 2021 are similarly high. The International Monetary Fund (IMF) projects China's 2021 growth at a staggering 8.1%, well ahead of the United States at 5.1%, and second only to India with a projected 11.5% growth. In addition to incredible growth, China has also surpassed the United States in terms of attracting foreign direct investment (FDI). 

While some companies have reacted to coronavirus disruptions by reshoring operations closer to their largest customer base, others saw how China's integrated manufacturing hubs with all elements of the supply chain regionally located were able to continue production throughout the pandemic. This has led some businesses to accelerate investment in China, redefining operations there as their main production sites. The two approaches are pulling in different directions, with some companies reshoring and others offshoring, but China has seen more investment come in than flow out. This trend will continue throughout 2021 and will likely outlast the coronavirus pandemic that precipitated it.

Potential Bumps in the Road Ahead

It wouldn't be an article about China without some seeming contradictions. There are some potential issues brewing for China's economy in the near term despite the strong performance. In addition to companies considering reshoring, more than a few nations are pushing for a more aggressive policy stance against China. Some of this resolve is related to the perceived lack of transparency on China's part as the coronavirus was first spreading. Regardless of the source, there have been signs of pushback from a number of developed economies, building on the trade spats between China and the United States under the Trump administration. 

In addition to potential international trade and policy headaches, China has also seen slowing productivity growth as its population simultaneously begins to grey. Rather than moving forward with long-promised reforms and encouraging private innovation, China seems to be set on keeping power in state-owned enterprises (SOEs). Jack Ma's recent troubles are just one example. The deference shown to SOEs and the resistance to reform will likely continue to drag on productivity even as China grows. 

The Bottom Line

China has essentially emerged from the coronavirus pandemic as strong as it went into it and on a timeline that seems unfathomable for other large economies. Working from this position of economic strength, China is poised to continue to grow while the rest of the world still struggles to bring the coronavirus under control.

There are some potential snags ahead for China, including upset international partners turning to tougher policy, slowing productivity growth, an aging population, and a lack of real reform. With all that being said, however, China has once again shown that, no matter the issues facing its economy, the markets need to be wary of betting against its continued growth.

Article Sources

  1. Cheng J. China is the only major economy to report economic growth for 2020. Wall Street Journal.

  2. World economic outlook update, January 2021: policy support and vaccines expected to lift activity. IMF.

  3. Hannon PH and Jeong E-Y. China overtakes U.S. as world’s leading destination for foreign direct investment. Wall Street Journal.

  4. Wei L. China’s economic recovery belies a lingering productivity challenge. Wall Street Journal.

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