The Chinese economy in 2020: exceeding expectations but challenges ahead

The Chinese economy expanded by 2.3% in 2020 with industrial production as the main driver, according to official data from the Chinese government. Industrial production increased by 7.3% year-on-year in December 2020, the largest increase since March 2019. This growth is in stark contrast with the first quarter of 2020, when the Chinese economy shrank with 6.8% compared to the first quarter of 2019.

China ended 2020 with a GDP growth of 6.5% in the fourth quarter. This result beats the forecasts of many economists and made the country the only major economic power that registered growth in the pandemic-ridden year. Despite the registered increase in GDP, China’s economy grew at the slowest pace in forty years. This was the result of lockdowns imposed by the Chinese government to combat the initial COVID-19 outbreak.

Industrial activity came to an almost complete halt in January 2020, when lockdowns were implemented due to COVID-19 and when demand from countries in the West was dwindling, which affected manufacturing companies in China. After a two-month lockdown, factories started to gradually resume manufacturing, resulting in a year-on-year increase of 3.9% in production in April. The increase in industrial production is reflected by Chinese exports; in December 2020 they were up 18.1% compared to the same month in 2019.

In 2020, Chinese economic growth targets were scrapped for the first time since 1990. “This is because our country will face some factors that are difficult to predict in its development due to the great uncertainty regarding the COVID-19 pandemic and the world economic and trade environment,” Premier Li Keqiang said in May.

Due to rising unemployment, the Chinese government initiated economic support measures to ensure social stability. These measures mostly focused on supporting smaller businesses, which contribute to the majority of jobs growth in China. Facing many uncertainties related to the COVID-19 pandemic, China is extending these measures until at least the first quarter of 2021. These uncertainties mean that China is likely to refrain from setting growth targets for 2021.

There are also those who question China’s apparent rebound from COVID-19. Barron’s, a US financial newspaper, writes that “key economic numbers have been wildly inflated.” It also argues that China does not include all firms in its financial reports and that it is not transparent enough with financial numbers. They do acknowledge that investment in Chinese stocks has surged (due to China managing to control the spread of the coronavirus), but they conclude that “these investments should not be driven by official GDP growth or a belief that China’s economy has returned to normal.” Similarly, Leland Miller of China Beige Book Consultancy stated in an interview with The Guardian that, while it may seem that China has rebounded from the pandemic, China is “not anywhere near being back to where they were before.”

2021 could well turn out to be a challenging year for the Chinese economy. Even if 2020 was relatively good, especially considering the current economic situation of most other countries, the looming shadow of structural problems in the Chinese economy remains. Three of the major challenges facing China include an aging population, a relatively weak position in the high-tech and innovation sectors, as well as restrictions on capital flows. An aging population, for example, means rising labour costs, which could undermine the Chinese export position. Another factor which could limit Chinese economic growth in 2021 is the current state of the job market. According to the Wall Street Journal, Chinese urban workers are still working fewer hours, and are earning less money than before the pandemic, despite the government providing support. This problem has especially affected the service industries, also involving China’s 290 million migrant workers.

Aside from domestic factors, China may find that the environment for investment abroad has become increasingly hostile, as countries like the US and many European states are becoming more and more wary of Chinese influence. Examples are a series of clashes between China and the United Kingdom over the independence of Chinese broadcasting company CGTN, and the critiques that the EU-China investment agreement provoked.

Considering how the economies of the European Union have seemingly suffered from the pandemic much more than the economy of China has, there are still some who fear there is a risk of European companies being acquired by Chinese investors. Especially now, as the EU is slowly starting to take a tougher stance on the PRC and its influence abroad, an increase in Chinese investment, and therefore influence, could indeed be a point of concern for policy makers in both Brussels and the national capitals of the Member States of the EU.

These worries were already voiced in May 2020 by Manfred Weber, the leader of the European People’s Party in the European Parliament. He warned that “Chinese companies, partly with the support of state funds, are increasingly trying to buy up European companies that are cheap to acquire or that got into economic difficulties due to the coronavirus crisis.” His warnings are an echo of the financial crisis in 2007-2008, when distressed businesses were often saved with the help of Chinese funding.

However, these fears have proved largely unfounded. According to a report by law firm Baker McKenzie, the amount of announced takeovers in Europe actually fell by 93% in 2020. This is likely due to a focus on the recovery of the Chinese domestic economy, rather than on investment abroad. Therefore, it is likely that Chinese investments into the EU will grow again once the global economy finds its bearings. This could present the EU with a dilemma when balance needs to be struck between allowing much-needed Chinese investment while controlling the risk of increasing Chinese state influence.