The International Monetary Fund (IMF) is forecasting that the overall impact of the pandemic on the Chinese economy for 2020 will be a 1.1% decline, before a return to strong growth of 9.2% in 2021.
China Market Review
As the final quarter approaches in the country in which COVID-19 initially emerged, China is progressing well on its road to recovery, and Helen Jie Shao, Country Manager – China at Linesight, reviews the economic and construction industry performance to date.
In 2019, China’s GDP growth amounted to 6.1%, which marked its weakest expansion in 29 years. Although 5.9% and 5.7% growth was forecast for 2020 and 2021 respectively pre-COVID, following the outbreak of the virus, the Chinese economy was heavily impacted in early 2020, with a 6.8% decline in GDP in Q1. However, Q2 saw a return to positive growth of 3.2% with the initial outbreak largely over. The International Monetary Fund (IMF) is forecasting that the overall impact of the pandemic on the Chinese economy for 2020 will be a 1.1% decline, before a return to strong growth of 9.2% in 2021.
The Purchasing Manager’s Index (PMI) declined very slightly from 51.1 to 51 between July and August, despite it being expected to increase slightly to 51.2. However, the fact that it is above 50, indicating growth, is positive. The export sub-index was also surprisingly positive, climbing to 49.1 in August, indicating that the pandemic-induced decline may have bottomed out.
The Government has implemented both monetary and fiscal policies to stabilize employment and maintain living standards, while also supporting key projects, helping small and medium-sized enterprises weather the challenging times, and supporting lower income citizens.
The above-mentioned slowdown in growth in 2019 was largely attributed to the China-U.S. trade dispute, before positive signs emerged with phase one of a trade deal signed in January 2020. Unfortunately, since then, tensions have once again intensified, which is having an impact on the Chinese economy and remains a risk factor.
Unsurprisingly, FDI has slowed due to the global pandemic, although investors are looking to the Chinese market, with other investment destinations still facing uncertainty with regards to the virus. The Ministry of Commerce is reporting that foreign trade and FDI have stabilized, with 7.1% growth year-on-year in paid-in foreign capital as of June.
The tourism, offline entertainment, hospitality, aviation, logistics and labour-intensive manufacturing sectors are among the worst hit industries, with revenues almost drying up. Conversely, life sciences, e-commerce, online entertainment and insurance remain relatively active, which may partially offset the adverse impact on the abovementioned sectors.
Construction was less affected than other key industries, although project progress has been impacted by the delayed return to site for workers. In fact, it is expected that the outbreak may serve as an incentive for additional investments in large-scale healthcare and infrastructure projects (such as railway, highway, Metro, environmental protection), as the Government strives to maintain stability in this sector.
The recent flooding in Southern China has also impacted construction activity, although the non-manufacturing PMI, which incorporates construction, grew to 55.2 in August.
While we noted in our March 2020 update that the Chinese working-age population is declining, and the elderly population is rising, the sharp economic slowdown caused by the pandemic is putting new pressure on the country’s labour market. Similar to what is being seen elsewhere, as some businesses struggle to maintain or revive operations, they have been forced to resort to pay cuts and layoffs, or simply shut down.
In summary, the economic data from the first half of the year indicates that the Chinese economy is recovering well from the impact of COVID. Given the speed of the economic recovery and the implementation of additional economic stimuli, the contraction in 2020 is not anticipated to be on the scale of what is expected for a number of other countries worldwide.