Even if the COVID-19 pandemic hit hard, China’s economic growth gradually lifted up in the second quarter of 2020 and GDP reached 45.66 trillion yuan with 3.2% year-over-year growth in the second quarter.

As the COVID-19 outbreak has been largely kept under control in most of the country, the key economic indicators are expected to turn positive in the third quarter. However, full economic recovery in China will be difficult to achieve as the pandemic continues to spread to some of the world’s major economies and is likely to continue to be a problem until the end of 2020.

Chinese imports and exports will continue to face the weak international market demand, but domestic consumption is expected to rise in the second quarter, thanks to political support and economic recovery measures that aim to reactivate the market in the fourth quarter of the year.

Let’s see in details what is happening. 

The sale of consumer goods

Total retail sales of consumer goods contracted 11.4% in the first two quarters (after a dramatic 19% reduction in the first quarter).
Sales resumed growth in June and are expected to return to previous positive values at the end of the third quarter. Indeed, most social and commercial activities returned to normal in the second quarter and consumer confidence will also gradually improve.
As the final consumer spending power is a major contributor to GDP growth (along with investment and exports), the resumption of consumer retail sales in the second half of the year will be crucial. Both central and local governments are therefore working to stimulate consumption.
As far as it concern tourism, the preventive measures to combat the COVID-19 pandemic still represent a great deterrent for people, especially considering that new cases continue to emerge even within the country. For this reason, although internal tourism has gradually restarted, we certainly cannot imagine a positive closure of the year.
Another heavily affected sector was that of catering which suffered a decline of 44.3% in the first quarter, with a recovery starting in June which today leads to a loss of 15.2% compared to last year.
Despite this, we have seen the growth of some sectors, such as online retail. Online sales rose 7.3% to 5.15 trillion yuan (-0.8% in the first quarter). Of which, online sales of physical goods increased by 14.3% to 4.35 trillion yuan, making up 25.2% of total retail sales. This shows how COVID-19 pandemic has accelerated the growth of online retail sales.

Imports and exports

In the first two quarters of the year, we obviously saw a decrease in imports and exports due to the COVID-19 pandemic, but in fact, the contraction was only 3.2% annually, therefore less dramatic than what we were expecting.
Unfortunately, considering that the COVID-19 outbreak has spread and is spreading to many countries from the second quarter, it is possible that imports and exports will continue to decline.
And it might not be only a Chinese issue, according to the WTO (World Trade Organization) global trade in goods will contract from 13% to 32% in 2020.
Due to the trade war with the US and the crisis that COVID-19 has generated in Europe, ASEAN has become China’s largest trading partner, and trade with ASEAN has increased by 5.6% year-on-year and reached a value of 2.09 trillion (representing 14.7% of China’s total international trade).
By giving a closer look, trade with the EU only dropped by 1.8% on a basis indicating that despite the pandemic, trade relations between Europe and China have remained relatively stable.

The Chinese digital economy

On July 14, China’s National Development and Reform Commission (NDRC), along with 12 central government departments, released guidelines to support the digital economy – (aka. the economy that relies on digital information technologies). The digital economy has emerged as one of the key forces driving China’s economic development in recent years. In the context of COVID-19, the digital economy played an essential role during the lockdown. People’s lifestyles and work habits as well as business models have changed significantly and are very likely to remain so in a post-pandemic era.
In particular, during the period of lockdown, digital businesses such as online education, home delivery, e-commerce, online entertainment, and remote work have become an essential part of daily life.

COVID-19 has substantially accelerated the fourth industrial revolution or rather, the digital revolution. As described a few years ago by Dr. Klaus Schwab, founder, and president of the World Economic Forum, the digital revolution is characterized by “a fusion of technologies that is blurring the boundaries between the physical, digital and biological spheres”. This revolution involves almost all sectors in various countries at an exponential rate and is transforming the systems of production, management, and governance.

As a developing country, China lagged far behind in the first and the second industrial revolution. However, the country’s reforms and openness policy over the course of the last 50 years have prepared China to become one of the most advanced economies in the current digital revolution. Given the importance of the digital economy in determining the country’s long-term prosperity, China is positioning itself as the world leader in this revolution.

According to the White Book 2020 on the development of the Chinese digital economy published by CAICT, in 2019 the digital economy contributed to approximately 67.7% to Chinese GDP growth. From 2014 to 2019, the contribution of the digital economy to the year-on-year GDP growth rate was consistently above 50%.
According to the CAICT, the digital economy now accounts for 36% of China’s GDP and is projected to account for over 50% of the country’s GDP by 2030.

In 2020, as a result of COVID-19, China’s economic growth should have been much lower, but this has not been the case thanks to the contribution of the digital economy, which will continue to grow as many lifestyles and businesses have moved to online or virtual platforms.

As a result, we can easily predict that the rapid growth of the digital economy will continue into the post-pandemic era, as people’s lifestyles and work habits have changed.
Furthermore, it is important to remember that China is home to some tech giants, heavily supported by the government and in the running to compete internationally.

What does this mean for companies that want to invest in the Chinese market? Digitization has long been no longer a choice, but a real necessity.

Data Source: China Economic Quarterly Q2/Q3 2020 by PWC

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