Why the Chinese recovery is still fragile

Audio 04:03

By: Dominique Baillard Follow

While the West is cautiously embarking on its deconfinement, China, where the pandemic started, started to resume its normal activities a month ago already. With mixed economic results.

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50 million Chinese have bought the luxury of doing some sightseeing on the weekend of May Day, one of the three traditional periods of vacation in the Middle Empire. With the health precautions that have become the new standard of social life, wearing a mask and taking regular temperatures in public places.

Confidence is therefore returning, but we are still far from returning to normal: last year 200 million trips were recorded to celebrate Labor Day. The Chinese appetite for life before is still timid. And the latest economic indicators give a very mixed picture of the recovery. The bright side of the recovery is the building boom, encouraged by the launch of new major projects. Investing in infrastructure is an old recipe for coming out of crises. But in the industry, despite the general reopening of factories since the beginning of April, the bosses remain cautious, because their order book is struggling to fill. And in trade, it is disappointment: retail sales fell 20% in February, for the month of March, the last figure available, they are still 15% lower than the previous year.

Have the Chinese lost the taste for consumption?

This is what the youngest say. Difficult to see for the moment a lasting trend. What is certain is that they have other concerns: they want to save. No more worrying about spending. The other factor that slows consumption is the erosion of their income. In the best of cases, wages or working hours have fallen sharply, because in order to receive state aid companies undertake to renounce dismissal. The bosses bias by reducing the number of hours or by reducing the wages. However, there is mass unemployment, which seriously grabs the engine of consumption. The official unemployment rate is 5.9%. The reality would be closer to 20%, or 70 million unemployed. Unlike Western countries, China has not deployed a safety net so that households can better withstand this sudden recession, its consumption is therefore struggling to regain the momentum.

Chinese foreign trade is also struggling.

The order books are still very thin and this could worsen in the coming months, because the large customers, the United States and Europe, which provide a third of the export outlets, are reducing their purchases, because containment, and recession, and that will get worse in the coming months. Chinese exports could drop 20% in the second quarter - according to forecasts from a large Chinese bank, CICC.

In the longer term, Beijing must prepare for the worst: under the pressure of events and governments, companies around the world could review their supply chain, diversify their sources more and therefore turn away from the workshop of the world. Not to mention the trade tensions with the United States that Donald Trump is reviving with his accusing tweets. Exports are no longer the main engine of Chinese growth, but they still constitute a key element of national wealth, in 2019 they provided 17% of GDP.

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