By He Jun*
Talks about China’s economic resilience and elasticity are nothing new. Following the 18th National Congress of the Communist Party of China, Xi Jinping, as he had done so numerous times in the past, stressed that China is a huge country that is resilient, possesses elasticity, and holds potential as well as plenty of room for maneuverability. He further emphasized that China’s economic strength is particularly adept at preventing risks. In fact, since 2014, Premier Li Keqiang too has repeatedly spoke of China’s economic resilience, having stated, “There has been difficulties yearly for the past few years though it was always successfully overcome. Bearing this year’s difficulties in mind, we must look to stimulate economic resilience and boost motivation.”
Resilience and Elasticity are terms in physics commonly used to describe a material’s properties. Resilience is defined as a material’s ability to withstand damage when subjected to pressure and/or a substance’s capacity to absorb mechanical or kinetic energy until it is damaged. Meanwhile, Elasticity refers to a material’s ability to return to its original form when force is exerted or the ability to reshape itself after being compressed. Should the material assume a different form upon removal of force and a certain degree of deformation occurs, we call that plastic deformation instead. When said force exceeds the material’s resistance, it will either deform or fracture. A good example to that are shocks caused by fracture stratigraphy under stress, otherwise known as earthquakes.
The words, resilience and elasticity, are associated with the economy here because it refers to the economic system’s ability to withstand and adjust to shocks. If an economy is resilient, it is said to possess a strong resistance and thus, will not easily collapse from any external and internal shocks, which also means it is not prone to any structural fracture. The second ability, elasticity, determines if it can return to its original state and regain robustness in the shortest period upon being subjected to pressure and shocks, and perhaps, even surpass the development level of a pre-pressure economy. If an economy’s elasticity is poor, a certain degree of plastic deformation occurs, resulting in structural changes to the system. To sum it up, resilience is the economic system’s ability to withstand pressure and shocks, and is a concept of crisis; meanwhile, elasticity refers to the economic system’s ability to recover and develop, and belongs to the concept of development.
In recent years, Chinese leaders have repeatedly discussed the issue of economic resilience, which arose from certain trends. One, China’s economy is having a hard time maintaining its past growth which has always been high, and it is shifting from a rapid growth to slower one, causing the economic growth to stall due to the excessive slow growths from time to time. For example, between 2010 to 2015, in just 5 years, China’s economic growth fell from 10.6% to 6.9%. Two, the Chinese leadership is promoting economic restructuring, with great efforts to reduce the economic leverage ratio to achieve economic growth model conversion and conversion of growth momentum. Three, the risk factors in China’s economy has increased, and so has the risk in possibility for outbreaks, especially debt risk and financial risk. By now, it goes without saying that each time China’s economy runs into any difficulties, decision-makers would often look to the economy’s resilience for hope.
The huge impact Covid-19 has on the global and China’s economy is putting its economic resilience to the test. Unlike the crises from 40 years past or so, this time around, the pandemic has caused 2 months’ worth of economic activity in China to “freeze”, disrupting supply chains and causing consumption to come to a near halt. Clearly, the pandemic’s impact has triggered a test that will certainly determine the life or death of China’s economy
On top of that, the national economy is experiencing a full-scale decline. According to data from the National Bureau of Statistics of China, the domestic economy fell 6.8% y-o-y in the first quarter, which was the first quarterly negative growth since the quarterly economic statistics in 1992. During the first quarter, the value-added of the industrial enterprises above designated size fell 8.4% y-o-y (down 1.1% y-o-y in March; between January to March, the total retail sales of consumer goods fell 19.0% y-o-y, a nominal decrease of 15.8% y-o-y in March); in the first quarter of 2020, China’s fixed-asset investment declined 16.1% y-o-y (reduced by 8.4 percentage points from January to February); for the first quarter, foreign trade of goods fell 6.4%, exports dropped 11.4% and imports slipped 0.7%; in the first quarter, the nationwide per capita disposable income of residents was RMB 8,561, a nominal increase of 0.8% y-o-y, or a real decrease of 3.9% post price factors-deduction.
Hubei, the first to suffer from the contagion, lost 39.2% y-o-y in the first quarter this year. Among the few industries it has, the primary industry decreased 25.3%, secondary industry decreased 48.2%, while tertiary industry experienced a decline of 33.3%. Fixed asset investment in Hubei province dropped 82.8% y-o-y in the first quarter (infrastructure investment fell 84.4%, private investment fell 82.6% and industrial investment fell 85.0%). Moreover, the retail sales of consumer goods totaled to 293.943 billion yuan, a y-o-y decrease of 44.9%. General budget revenue was 54.249 billion yuan, a decline of 47.6%. Among them, tax revenue was 43.404 billion yuan, a decrease of 45.9%. The general budget expenditure was 155.506 billion yuan, down 14.1%. In the first quarter, the per capita disposable income of urban permanent residents in the province was RMB 9412, down 11.8%; the per capital disposable income of rural permanent residents in the province was 4085 yuan, down by 10.2%.
It was expected that the economic data of the whole country (Hubei included) would fall sharply. However, the economic downturn is not as severe as what ANBOUND had previously estimated, especially considering Covid-19’s impacts and the degree of economic freeze. ANBOUND’s chief researcher Chan Kung stated it’s an objective fact that the first quarter of economic data reflects China’s economic resilience. Once again, take Hubei for an example, the hardest-hit city and ground zero to the virus. The 76-day lockdown has caused its economy to freeze almost completely. Plagued with “wartime-like conditions”, all productions save for essential services were forced to shut down for a certain period, causing the province’s GDP to have a negative growth of 39%, which is far below the previous estimate of a 50% drop. Based on that result alone, Chan Kung believes resilient is a fitting word to describe China’s economy.
With that said, the next question to ask is, what enabled Hubei as well as the rest of China’s economy to last during the first quarter of the year when things were visibly tough? More specifically, where exactly does China’s economy get its resilience? In our opinion, the answer lies in two economic activities. The first being the essential consumption activities derived from a large population, and the second which are the basic infrastructures of the city like water, electricity and heat that kept the economy going. Throughout the entire time the city was placed under a strict lockdown and traffic was nowhere to be seen, the basic act of eating, drinking, sleeping went on; as did other basic facilities such as water, electrical, heating, and other basic infrastructure operations. Chan Kung emphasized that it was thanks to the continual operation of essential services that the GDP’s negative growth dropped by 39% only and this is where the economy gets its grit. The same applies for other countries when a comparison was drawn and inferred. China’s urban infrastructure accounts for a large portion, not just in Hubei or Wuhan City, but also in its national statistics. So long as urban infrastructure like water, electricity, and heat remain in operation, it will be able to hold out and China’s large GDP growth is guaranteed, especially since it makes up for a considerable proportion of the country’s economy.
As for online consumerism that has become a fad over the recent years, it is very much expected to suffer a loss too, reason being that a part of the rapid growth in online consumerism stems from conventional methods of consumption, thereby causing the overall consumption growth to remain stunted in recent years. Seeing that the GDP contribution has fluctuated somewhat, the overall change is small. A case in point is the total retail sales of consumer goods that has fallen 19.0% y-o-y in the first quarter, while national online retail sales fell only 0.8% y-o-y. Among them, the online retail sales of physical goods also maintained a y-o-y growth of 5.9%, accounting for 23.6 of the total retail sales. Based on the consumption structure, what can be surmised is the emergence of a new group of consumers as compared to the past, that or some consumers have changed their consumption habits. Simply speaking however, so long as the population of consumer remains huge and ever functioning, consumption will forever be one of China’s most important pillars of support as far as resilience is concerned.
As analyzed above, economic resilience is a concept of crisis, which primarily targets economic downturn or difficult situations. It is largely dependent on soft and hard conditions such as population size, infrastructure system, logistics support system, and online sales system. If a disaster occurs, then it also takes the collective endurance of the people into account. Then, there’s economic elasticity, which is a different matter altogether. When it concerns reviving the economy, restoring economic prosperity, and improving economic quality, economic elasticity comes into discussion. With that in mind, economic elasticity is a concept of development. To ANBOUND researchers, economic resilience does not equate to economic elasticity and vice versa. The point of highlighting the difference in policy is to stress that after China’s act of relying on economic resilience to get past difficult times, comes the country’s need to recover its development elasticity and achieve higher quality development, though it must expect greater challenges. Economic elasticity depends on various factors such as economic structure, industrial structure, consumption structure, degree of marketization, allocative efficiency, business environment, and public service quality. In short, to obtain better economic elasticity, China’s market must be reformed significantly.
Final analysis conclusion:
The economic data for Hubei and China in the first quarter of 2020 shows the tenacity of China’s economy when faced with disaster. The support of basic consumption activities through a large population and city’s basic infrastructure operations such as water, electricity and heat were the two major factors that gave China its economic resilience. Having said that however, to achieve better economic elasticity, China’s market must first undergo a significant reform.
*Mr. He Jun takes the roles as Partner, Director of China Macro-Economic Research Team and Senior Researcher. His research field covers China’s macro-economy, energy industry and public policy.