China beats the US in post-crisis recovery – again

NEW HAVEN, CONNECTICUT (CNA) – Just as China led the world in economic recovery in the aftermath of the global financial crisis of 2008, it is playing a similar role today. Its post-COVID rebound is gathering momentum amid a developed world that remains on shaky ground.

Unfortunately, this is a bitter pill for many to swallow – especially in the United States (US), where demonisation of China has reached epic proportions.

The two crises are, of course, different. Wall Street was ground zero for the 2008 crisis, while the COVID-19 pandemic was spawned in the wet markets of Wuhan.

But in both cases, China’s crisis-response strategy was far more effective than that deployed by the US. In the five years following the onset of the 2008 crisis, annual real gross domestic product (GDP) growth in China averaged 8.6 per cent on a purchasing power parity basis.

While that was slower than the blistering and unsustainable 11.6 per cent average pace of the five previous years, it was four times the US economy’s anaemic 2.1 per cent average annual growth over the post-crisis 2010 to 2014 period.

China’s pandemic response hints at a comparable outcome in the years ahead. The GDP report for the third quarter of 2020 suggests a rapid return to the pre-COVID trend. The 4.9 per cent year-on-year figure for real GDP growth does not convey a full sense of the self-sustaining recovery that is now emerging in China.

Measuring economic growth on a sequential quarterly basis and converting those comparisons to annual rates – the preferred construct of US statisticians and policymakers – provides a much cleaner sense of real-time shifts in the underlying momentum of any economy.

On that basis, China’s real GDP rose at an 11 per cent sequential annual rate in the third quarter, following a 55 per cent post-lockdown surge in the second quarter. The comparison with the US is noteworthy.

Both economies experienced comparable contractions during their respective lockdowns, which came one quarter later for the US. China’s 33.8 per cent sequential annualised plunge in the first quarter was almost identical to the 31.2 per cent US contraction in the second quarter.

Commuters wearing face masks to help curb the spread of the coronavirus walk against commercial buildings at the Central Business District as they exit a subway station during the morning rush hour in Beijing. PHOTO: AP

Based on incoming high-frequency monthly data, the so-called GDPNow estimate of the Atlanta Federal Reserve puts third-quarter sequential real GDP growth in the US at around 35 per cent.

While that is a welcome and marked turnaround from the record decline during the lockdown, it is about 20 per centage points short of China’s post-lockdown rebound and still leaves the US economy about three per cent below its peak of late 2019.

Post-lockdown rebounds are not the real story, however. They are akin to the snapback of a stretched rubber band – or in statistical terms, the arithmetical result of restarting an economy that has just been subjected to an unprecedented sudden stop. The true test comes after the snapback, and that’s where China’s strategy has its greatest advantage.

China’s response to COVID-19 borrowed a page from its playbook in 2008, when it ring-fenced its financial markets from the toxic fallout of the subprime crisis.

The objective back then was crystal clear from the start: address the source of the shock, itself, rather than the collateral damage the shock caused. The USD596.4 billion fiscal stimulus of 2008 to 2009 worked only because China had taken strong actions to insulate its markets from a virulent financial contagion.

China’s approach today is similar: First, insulate its citizens from a virulent pathogenic contagion with public health measures aimed at containing and mitigating the spread of the disease, and then – and only then – make judicious use of monetary and fiscal policy to reinforce the post-lockdown snapback.

This is very different from the approach taken in the US, where the post-lockdown debate is more about using monetary and fiscal policies as frontline instruments of economic liberation, rather than relying on disciplined public-health measures aimed at virus containment.

This underscores the sharp contrast between China’s COVID-first strategy and the America-first approach of US President Donald Trump’s administration.