The Resilience And Elasticity Of The Chinese Economy – Analysis

Wei Hongxu

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After experiencing the short-term impact of the COVID-19 pandemic, the Chinese economy has gradually emerged from its effects.

Following its recovery from the pandemic, the prospects for the country’s economic recovery and growth are increasingly viewed favorably by domestic and international institutions. At the same time, the Chinese government is strengthening policies aimed at stabilizing the economy, hoping to return it to normalcy as soon as possible. However, researchers at ANBOUND believe that judging the current state of the Chinese economy requires careful consideration of its resilience, in which the recovery process will continue to be gradual.

With the outbreak of the pandemic in 2020, researchers at ANBOUND conducted some discussions on the impact of the pandemic on the Chinese economy, pointing out that as the world’s second-largest economy, China’s economy had strong resilience and would rebound quickly after short-term restrictions of the pandemic. However, this rebound was a rapid recovery and it would return to a trend of gradual slowing in the medium to long term. After achieving a recovery rebound of 8.1% in 2021, the country’s economy plunged again in 2022 due to the repeated impact of the novel coronavirus outbreaks, which were more severe and lasted longer than in 2020. The reversal of the real estate market trend has also dealt a blow to the economy. Although it still achieved a growth rate of 3%, the survival and confidence of market players have been greatly affected.

Figure 1: Changes in China’s CPI, PPI, and PMI Indexes. Source: National Bureau of Statistics, chart plotted by ANBOUND

Although the Chinese economy has shown strong resilience during the three-year pandemic, the lack of solutions to various structural and supply-side problems means that its elasticity is still lacking, resulting in some worries about the extent and progress of the recovery. From the PMI, it can be seen that the rebound is significantly weaker than in 2020 when the pandemic was initially contained, indicating that the momentum for the economy to rebound after pandemic policy adjustments remains insufficient. At the same time, although the CPI rose slightly in January, the PPI index continued to shrink, indicating the long-term problem of the coexistence of stagnation and inflation. Even though the economic data in January has recovered somewhat, the expectations shown by the trend in the capital market still indicate insufficient confidence in economic recovery, and the foundation of the overall economic recovery is not exactly solid.

Wu Ge, the chief economist of Changjiang Securities, has pointed out in a recent analysis of the post-pandemic economic recovery trends in various countries that, looking at countries that have relaxed their COVID-19 measures, their economies often exhibit two stages of characteristics: the first stage being a spontaneous rebound and the second stage tending to be flat or even decline. In the first stage, the relaxation of COVID-19 policies is the overwhelming force that determines the economic rebound. The spontaneous rebound period in various countries lasts for about 1-2 quarters and then tends to ease.

However, most countries have difficulty returning to pre-pandemic levels, which may be related to the damage to the balance sheets of microeconomic entities, requiring a process of recuperation. It may also be related to the retraction of overall demand policies, as the strongest fiscal and monetary policies often occur when the pandemic was most severe, rather than during the post-pandemic recovery phase. Wu believes that China’s spontaneous economic rebound phase has not yet ended, and perhaps it will tend to ease in the middle and late part of the second quarter. After that, as the pre-positioning effect of fiscal policy weakens, and microeconomic entity balance sheets gradually recover, the negative impact of external demand on the economy will become more prominent.

Coupled with base effects, the two-stage characteristics of China’s economy may become more significant. Wu’s view actually indicates that in the absence of structural stimulus policies, the path of economic recovery has universal significance for all countries, and the same is true for China. This is similar to the views of researchers at ANBOUND, who believe that the spontaneous rebound is largely due to resilience, while the economy tending to level off in the second quarter is a manifestation of insufficient elasticity. Under such circumstances, China’s economy still faces a path of long-term slowing growth.

Figure 2: Schematic Diagram of Post-Pandemic Economic Recovery in Asian Countries. Source: Wu Ge’s Economic Notebook

Researchers at ANBOUND have recently mentioned that China’s economy during the recovery period would demonstrate restorative growth. However, as this growth is restorative in nature, it differs greatly from normal growth in terms of form and meaning. Normal growth is developmental and incremental, while restorative growth is remedial and reparative. Currently, this type of growth that has data significance but lacks incremental contribution may be the reality of the economic recovery period. This also reflects the resilience and elasticity of the Chinese economy.

Aside from the unfavorable external environment, looking at the country’s domestic economic situation, the price levels indicate that the recovery of demand is not strong, while the recovery of the service industry is also a gradual process. On the production side, the old problem of industrial overcapacity has not been effectively solved. The resilience of the Chinese economy still needs to be restored by gradually stabilizing investment and the real estate market. In terms of economic elasticity, there is still hope for strengthening investment in emerging industries and innovation by private enterprises. Yet, this process cannot be achieved overnight. After the recovery from the pandemic, China’s economy faces a new situation of “stagnation” and “inflation” existing simultaneously. This not only poses new challenges for its future development but also differs from the conventional economic pattern.

After the impact of the pandemic, China’s economy still has considerable resilience, a fact that has been repeatedly mentioned by ANBOUND researchers. However, the recovery of internal driving forces and the enhancement of economic elasticity are anything but easy and will take time. This process not only requires the care of macro policies but also needs to provide market entities with a period of “rest and recuperation”. Policy promotion, therefore, should not be too hasty but should rather be based on the long term, maintaining a balanced and smooth transition between the demand and supply sides.

Final analysis conclusion:

After the gradual fading of the pandemic’s impact, there are optimistic expectations for the recovery of China’s economy. However, the characteristics of China’s economy being sufficiently resilient and insufficiently elastic remain apparent. This means that its economic recovery is a gradual process that requires not only policy care but also rest and recuperation.