What China's uneven recovery means for the U.S.
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China and much of Southeast Asia look to be bouncing back strongly from the coronavirus pandemic as stock markets and much of the country's economic data are returning to pre-pandemic levels.
What's happening: "Our tracking points to a clear V-shaped recovery in China," economists at the Institute of International Finance said in a note to clients Tuesday, predicting the country's second-quarter growth will rise above 2% after its worst quarter on record in Q1.
- "The manufacturing recovery appears complete and exports also normalized."
By the numbers: Investors have responded by sending Chinese stocks skying — the CSI 300 index of Shanghai and Shenzhen-listed shares jumped as much as 5.7% on Monday, the biggest daily gain since February 2019 — thanks in no small part to urging from the Chinese Communist Party encouraging retail investors to buy stocks (subscription).
- And while U.S. shares retreated on Tuesday, the CSI 300 touched a new five-year high and rose again on Wednesday.
- The CSI 300 is up more than 15% in local currency terms year to date and over 18% since June 1.
Yes, but: While Chinese services sector data has rebounded, according to official and private sector data, IIF economists warn, "Consumption is still heavily disrupted. Retail sales are significantly below pre-COVID-19 levels and look U-shaped at best."
Why it matters: Many in the U.S. have looked to China as a model for an eventual U.S. rebound, but the details of China's recovery belie that hope.
- In addition to China's ability to contain its coronavirus outbreak much more quickly and effectively, manufacturing makes up nearly 30% of its economy, compared to around 10% for the U.S., according to the latest data from the World Bank.
- Services, driven by things like retail sales and restaurants, make up a little over half of China's GDP versus more than three-quarters of GDP for the United States.
Between the lines: China's manufacturing also has been heavily supported by government stimulus — IIF estimates fiscal stimulus could add up to 7% to 9% of GDP, or $1 trillion to $1.3 trillion — and the growth of medical supply sales as a result of the pandemic.
The big picture: The key to a U.S. economic rebound will be a sustained revival in services — but data show that even in countries that were hit early and quickly contained their outbreak, recovery has been slow and incomplete in that sector.
