The Pandemic Remade the Chinese Economy

The Pandemic Remade the Chinese Economy

Other countries should prepare now for their own reformations.

China is the only large economy that posted positive growth in 2020. By the year’s third quarter, GDP was back to its pre-pandemic and economic crisis level. The most recent indicators suggest that the country’s economic rebound is gathering pace. The most important factor in this remarkable performance has been the containment of the health crisis that started in Wuhan last December and now appears to be under control in China, fewer than 100 new cases being reported each day at the moment across the whole country. China was the first country to enter lockdown and the first to exit in March 2020. Unlike Europe or the United States, it has not experienced a second wave of contagion.

Despite a rather favorable economic and health situation, life in China is far from normal. The scars from the pandemic are running so deep as to prevent Chinese households from resuming their old consumption habits. Although factories reopened in the spring and returned to full capacity under government pressure, Chinese consumers have still limited their purchases almost exclusively to the essential. Higher unemployment, falling incomes, and fear of contagion are weighing on consumption.

To see the decoupling between the supply side and the demand side of the Chinese economy, it is helpful to look at rail traffic, which is a key variable in understanding the underlying dynamics. Before the COVID-19 pandemic, and given the unreliability of official GDP numbers, freight and passenger rail traffic was widely watched by China analysts to gauge changes in industrial production activity and in private consumption, respectively. When final goods leave a factory, they are shipped across the country for domestic purchases or to the closest port for export. Equally, Chinese citizens get on trains (more than planes) for high-end consumption like tourism or leisure—not to mention business trips.