A glance at Chinese Economy: rebounding or stalling?

Summary

• Though economically China showcases progress, geopolitically China is garnering backlashes across the world, especially from the US for its recently imposed National Security Law on Hong Kong.
• China’s relationship with the US reached a new low in July, with the US President Trump signing a legislation to impose sanctions on Chinese officials and financial institutions abusing Hong Kong’s freedom rights.
• The deteriorating relation amid nations has already snapped the special trade status Hong Kong used to share with the US.
• While trade relations between the US and China remains uncertain, Chinese domestic economy is also showing slow recovery with falling retail sales despite an uptick in manufacturing activities and services in the second quarter.

Economic recovery of China is certainly uncertain with myriads of developments threatening nation’s stability. The second quarter proved to be promising for China with services sector PMI and Manufacturing PMI establishing growth on consecutive months.

Though economically, China is showing progress, geopolitically China has been surrounded with controversies. China is practically in row with most of its neighbours including India, Japan, Tibet, and Xinjiang. China’s move on Hong Kong has also faced criticism internationally. Besides, the country had been gathering backlashes for its inability to contain the virus within borders.

Trade Relations with other countries have also been soured. Along with the US-China trade war, nations such as Australia is facing various trade related concerns. China banned beef exports from four abattoirs located in Australia post its PM Morrison asked for an investigation regarding spreading of the virus globally from China.

Trump Signs law to condemn Hong Kong law

China’s relationship with the US is now facing a new low with the US President Donald Trump signing a legislation, on 14 July, giving more power to his administration to impose sanctions on Chinese officials as a response to the national security law imposed by Beijing on Hong Kong. Mr. Trump highly condemned the law enforced by China citing the law has powerful new tools that when used by individuals and entities, may affect Hong Kong’s freedom significantly.

The bill imposes sanctions on financial institutions, whose act would reflect violation of Hong Kong's autonomy. The move came after China levied an anti-subversion law on Hong Kong to stall the pro-democracy movement in Hong Kong.

China has responded by stating that it would take stern actions in case the United States approves the legislation, or if it gets implemented. China has already highlighted visa restrictions against the US individuals who have shown egregious behaviour regarding Hong Kong.

The US Department of State has communicated that officials demonstrating abusing rights in Hong Kong would be prohibited from entering the nation. Trump had signed an order halting special trade and economic privileges for Hong Kong Earlier.

According to PM Trump, with Hong Kong losing its special status, the US is left with one less competitor in the free market trade, giving more business opportunities to the US.

Rising Manufacturing PMI – is Economy Recovering or otherwise

On 30 June, National Bureau of Statistics revealed that the purchasing managers' index (PMI) for China's manufacturing sector hit 50.9 in June from 50.6 in May. An uptick in manufacturing activity in China reflects a rebounding economy backed by rising domestic demand.

According to the Caixin China General Manufacturing Purchasing Managers’ Index (PMI), the nation’s manufacturing sector increased to 51.2 in June from 50.7 recorded in May. Besides the manufacturing sector, China’s services sector also showed strong recovery in June.

However, does rising manufacturing PMI reflect a rebounding economy?

Many Chinese nationals are moving from cities to suburbs as economic conditions remain uncertain, for saving money as they do not feel financially secure anymore.

According to Qu Hongbin, Asia economic research co-head at HSBC, “the recovery pace of China is uneven, and he expects a growth of 1.2% in Q2 compared to pcp, indicating the recovery is not fully based on recently published GDP.”

First quarter of 2020 in China experienced a fall of 6.8%, representing first annual decline in more than 4 decades. Economists highlighted that GDP numbers would showcase a mixed recovery. Though government aid will help industries to sail through, consumption trajectory growth may be slow to pick up with people and businesses more focused on savings.

Further, a rise in industrial activity has assisted China’s share of global steel production to reach record heights, backed by infrastructure projects pursued by local governments to encourage their economies.

In May, the central government secured “special purpose” debt amounting Rmb3.75tn, echoing measures taken by China, post 2008 financial crisis when infrastructure spending was increased to support the economy, showcasing implementing fiscal policy to stimulate consumption.

According to Iris Pang, chief economist at ING, “the government can assist in improving the industrial production, however, cannot bring improvement on overall economic growth.”

Retail sales representing the purchase of finished goods and services, part of a country’s economic performance, continued to be weak in the second quarter and fell by 3.9%. According to a UBS survey, consumer spending has gone up on daily goods and has decreased on travel and hospitality and offline entertainment.

Local governments in about 200 cities have issued coupons to induce consumption and back local businesses, which may get reflected in the upcoming retail sales data. This move was made because savings across China increased due to contraction in employment, for June month, according to a widely referred survey of economic activity. PBOC (People’s Bank of China) revealed that total household deposits increased to Rmb14.5tn in 2020.

HSBC’s Mr Qu Hongbin said that unless a viable medical treatment or a vaccine hits the market, people would continue to be wary.

New customs data has revealed that exports have increased by 0.5% over pcp backed by a demand risen from a backlog in the first quarter. However, with geopolitical relations with many countries deteriorating, future of foreign trade development remains uncertain.