China 2020 Economic Report - H2

Executive Summary

• China is going through a V-shaped recovery driven by industrial output and the real estate sector. Growth went from from -6.8% growth in Q1 to +4.9% in the Q3, and reaches overall +0.7% during the three first quarters.
• While consumer confidence has been picking up (+4.3% YoY in October), retail sales of consumer goods are still -5.9% on the time frame from January to October.
• This can be linked to lasting concerns on urban employment: whereas the official urban unemployment rate reached in 4.9% in September, recruiting is still low in the priority list of many companies. According to a CFO-survey carried out by UBS, companies had only recruited 2/3 of their labour demand on average as of Q3.
• After a -10.8% drop in Q1, inward foreign direct investment started to improve in April (+8.6% year-on-year) and investment reached USD 137.20 Bn end of November, with a +6.3% year-on-year increase. Most of the FDI heading to China went into high-tech industries. Outward investment decreased overall -4.4% in the first semester, but increased strongly (+53.1%) in ASEAN countries.
• China’s foreign trade was hit hard by the pandemic in Q1, with exports slowing by -9.3%, while imports contracting by -7%. Yet, at the end of Q2, exports increased +0.3% due to strong demand in medical equipment, textiles (including masks) and electronics. In Q3 China recovered above pre-pandemic level. Exports were up +8.9% YoY and imports were up +3.51 % YoY. In the first three quarters, trade with the ASEAN registered an increase of +7.7%, compared to +2.9 with the EU and +2% with the US.
• Swiss exports to China decelerated by -22.7% year-on-year by the end of October when including precious metals, which peaked -74% over the first ten months. However, when isolating precious metals, exports grew by 4.4%, driven by chemicals and pharmaceuticals (CHF 5.2 bn; +12.5% YoY). Exports of precision instruments, clocks, watches and jewellery are catching up: while the growth from January to October is only +2.4%, this category of products registered a jump of +46.8% YoY in the third quarter.
• Imports from China to Switzerland grew by +8.8% in the same period, driven by textiles (+58.3% year-on-year).
• To face the crisis, the Government allowed the deficit-to-GDP ratio to be raised to more than 3.6% (up from 2.8% 2019) and allowed the emission of RMB 1 trillion in special bonds for COVID-19. However, it refrained from enacting a large-scale stimulus package as it did after the 2008 global financial crisis to boost economic recovery. All in all, the stimulus has been worth about 5% of GDP.
• The fiscal and monetary policies have been targeted and cautious, in order to avoid elevating already high debt levels and consequently destabilizing the economy.
• The 14th Five Year Plan has emphasized a switch from high-speed to high-quality in its economic goals through the "dual circulation" model. This strategy means an economic development pattern that takes domestic development as the mainstay. It indicates an accelerated shift from China's export-oriented development strategy.