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China’s Mercantilist Recovery After Covid-19

BLOG - 2 December 2020

Facts and figures show it. China, where Covid-19 first rose, and the country which enforced the world’s most rigorous lockdown, is also the world’s only major economy that ends 2020 on a string of economic achievements. GDP YoY growth will be between +2 and +3%, a unique performance and even more impressive as this is already the world’s second-largest economy. All other major economies are in the red. India is near –9%, the Eurozone at –7 to 8%, Japan at –5 to 6%, and the US at –3 to 4%. 

This is well-known. Less well understood is how China, by luck and by design, has achieved this economic recovery by prioritizing companies and production over market demand, boosting exports during a global trade recession, and abstaining from the various forms of quantitative easing that other industrialized countries have put in place. 

China’s trade and current account performance

In a year where global trade is expected to fall by more than 10% according to the IMF, China has actually increased its YoY exports. They were already, contrary to all expectations, in positive territory by Q2 2020, and in Q3 they grew YoY by 10.2%, ensuring that China’s Covid year ends with a YoY export growth and not a decline. Needless to say, this is also reflected in China’s trade and current account surplus figures, which are reaching levels unseen since the 2008 global financial crisis. For the record, the economists’ consensus at the end of 2019 was that large Chinese trade surpluses were a thing of the past and that the current account would trend into the red. 

By April 2020 – even as China was emerging from the Covid-19 crisis several months ahead from Western societies – most observers (this writer included) believed that the global recession would hurt Chinese exports and dampen its recovery. The very contrary has happened. China’s share of world exports has rebounded – its exports now represent an increased 16.4% share of those from the top 24 world economies. In addition, foreign investors have flocked to Chinese public bonds, because they carry a positive interest, which is not the case for nearly every other major economy. China’s current account surplus would be even larger if China had not made considerable deposits abroad as well as purchases of dollar-denominated foreign bonds, particularly from Japan. China’s overseas deposits have steadily increased to 24% YoY between April 1 and September 1, 2020, with a 100 billion USD increase in Q2 2020 alone. Private investors also shifted around 75 billion USD abroad, which may reflect a fear of the US-China trade and financial conflict: overall, these moves have considerably diminished what would be a very large current account surplus. Some of the central bank and state banks’ moves seem intended to counter further RMB appreciation, with the added incentive to avoid the consequences of potential sanctions and to keep access to USD resources. 

Trade figures by regions and countries for the first 10 months of 2020 can also be surprising. While the bulk of the commentariat agrees that the Trump administration’s trade policy on China has been a failure, exports to the US are so far only up by 1.6% YoY, and imports from the US are up by 3.3% (all trade data cited are in USD, and are published by China Customs). This compares with +3.7% for exports to, and –1.4% for imports from the EU. Two European countries stand out as losers: France and the UK, with Chinese sales up by 9-10% in both cases and exports to China declining by 14.2% and 16.7% respectively. The biggest leaps in China’s foreign trade are with Vietnam and Malaysia – a consequence of China’s digital trade boom, and a confirmation that the recently concluded RCEP is going to be a vehicle for the region’s global exports to third countries.

China’s share of world exports has rebounded – its exports now represent an increased 16.4% share of those from the top 24 world economies.

In fact, these figures likely incorporate some avoidance of US tariff increases and actual or potential technology denials. China’s import-export trade in integrated circuits with ASEAN has increased respectively by 23.8 and 29.1% in 2020. After accounting for China’s digital export boom, this also includes a diversification of sourcing. Just as major companies, such as Apple, diversify their production away from China, China feels the risk from export limits placed on high-tech manufacturers, especially in the US and in Taiwan.

In a different but related development, it is significant that, for the first time, China’s official figures for exports to the US have exceeded the mirror import figures reported by the United States: it is likely that US importers have undercounted the value of their purchases to avoid tariffs, and that there is some use of third countries to avoid the tariffs on goods originating from China. This will become politically sensitive, as the issue of trade policy is one of the first that the incoming Biden administration must tackle.

The policies behind China’s banner year

Successes of this magnitude don’t come without several factors coming into play. 

To be fair, the first factor is also the most obvious. Whatever the debate on the origins of the coronavirus and the government’s initial obfuscation, the rigorous lockdown, consistent methods to test, trace and isolate, with the apparent support of the population even in extreme circumstances, have put China in the unique position of emerging from the pandemic while much of the world outside East Asia was plunging into it. Both for state enterprises and foreign-owned (or joint venture) enterprises, the return to work was impressive from Q2 2020. This is a tangible success, not the result of a special Chinese cultural trait: to this day, the recovery has been less marked for public transportation and mobility, and for outside dining and all entertainment in general. It shows that after the pandemic, there is still a shared fear that inhibits consumption in the transport and service sector.

But the second factor is undoubtedly a series of policy decisions that one could sum up in the following words: China first, offer before demand, free-riding global support for recovery and limiting the rise of financial risks. Even some SOEs are now allowed to fail, as has happened to private financial companies this year.

Most major global economies have launched major support to demand in two different forms: one is the Quantitative Easing (QE) by central banks; directly (with huge monetary creation in the US) or indirectly (with the indirect buy-back policy of the European Central Bank). Meanwhile, the longer Covid-19 pandemic in both the US and Europe has created a protracted production downturn: the result is a gap between a diminished production offer and a fairly stable demand that is sustained by monetary policy. This is even more pronounced in countries that have directly subsidized demand with impressive welfare and unemployment benefit schemes. 

During the 2008 global financial crisis, China had acted in parallel with the central banks and governments of the West, Japan and Australia, and had provided a huge stimulus in monetary and credit creation. Not so this time. China’s measures to tackle the economic emergency are the reverse of the West’s and Japan’s. What China has done is above all to revive offer, and not demand. It encompasses massive support of SOEs, reviving infrastructure projects, very large spending plans for the digitalization of the economy (including 5G), and credit for enterprises (including SMEs and self-employed workers). But jobs outside the state sector were not protected, and social expenditures have hardly moved. And from Q2, the state has again started reining in real estate loans, limiting the ability of local administrations to collect resources through land sales.

It has also limited new infrastructure projects, by imposing profit criteria that originally aimed at preventing new local government credit bubbles, but in practice hampered the allocation of fundings. One can see the results of this lopsided policy through several indicators: by October 2020, infrastructure investment has only grown by 3.2% YoY. Prices, including consumer prices, have remained nearly flat (only +0.5% for the last three quarters). Additional credit has not fueled much more market demand. And from Q3 2020 onwards, the government has reined in credit in general.1Officially, unemployment is now contained (at 5.4% in Q3 2020), but it is widely believed to be underestimated in SMEs and in the countryside.

The second factor is undoubtedly a series of policy decisions that one could sum up in the following words: China first, offer before demand, free-riding global support for recovery and limiting the rise of financial risks.

There are two rational motives that explain the decisions to boost offer, but limit monetary creation and refrain from countercyclical policies supporting household income and social expenditures. The first is to avoid, at all costs, adding to China’s already large debt burden and international financial risk, in view of the overall conflict with the United States. In fact, this motive may have been reinforced by a perception of growing financial risks for the Western economies themselves, given their extraordinary use of monetary creation and lending. 

But a second, and just as important factor, has been the opportunity to leverage the gap between production and demand in these economies with a massive increase of China’s exports. The trend has been particularly successful in some sectors. According to Chinese sources, these are digital equipment related to at-home working (China delivers 55% of world exports), for home appliances (50%), for epidemic-related medical supplies (30%), and for machinery (25%).2Overall, China’s export surge is the mirror of the world’s industrial production decline:

Graph 1: China's Global Export Share vs. Global Industrial Production

Source: Wu Ge et al, "How long will the strong exports last? (强势出口到何时?)", China Finance 40 Forum, November 26, 2020,


Chinese economists debate the duration of this export bonanza. Some see it as a short-term windfall. Others seem confident it will last through 2021, where YoY export growth could hit 6%, for two interrelated reasons. In their own words: "Faced with the second epidemic in the fall and winter, the developed countries can only implement a new economic lockdown and a new round of fiscal stimulus if the vaccine is not fully effective(…) If the new round of fiscal stimulus is delivered on schedule (…), the party in the capital markets will not stop".3 

China first, and a renewed mercantilism

In short, Western pessimism is Chinese optimism. China’s economy will keep growing through exports to developed economies with a production gap created by the pandemic. One must say that this seems to coincide with concrete policy on several fronts, such as the renewed preference for the state-driven economy over market, the reining in of non-traditional finance (digital platforms such as Alibaba) which boosted consumer spending power, and the very limited scale of social expenditures: the anti-poverty plan that is a mainstay of official policy is geared to transfer more low-wage workers to industry rather than to boost local purchasing power. It does clash, however, with the stated intent of the new "dual circle" economy, which is supposed to fire China’s second growth engine, i.e. its own domestic market. 

It also seems to create some controversy within China’s financial circles – one of the last that seems conceivable in the Xi Jinping era. Recent publications cited above from the China Finance 40 Forum include criticism or polite suggestions to pursue a more proactive support policy: more 5G investment, renovation of city centers, and support for auto purchases in the countryside. From a European perspective, it is useful to mention that these proposals do not seem to include any mention of "greening" the demand side: this is surprising since there is no lack of green industrial sector policies. These suggestions are rounded by Yu Yongding. The noted economist repeats a plea he has made for several years now to initiate more proactive fiscal policies and a looser monetary policy, and to emulate the Western central banks in buy-back schemes for public bonds, in order to create the conditions for a more sustainable growth.4

Even expressed by a fairly mainstream financial forum, this seems to be a fringe view. Instead, a new Chinese ordoliberalism, combined with renewed mercantilism, are the crux of present macro-economic policy under Xi Jinping. 


1 Interviews of Yu Yongding & Zhang Bin (Institute of World Economics and Politics, CASS), and Zhu He (China Finance 40 Forum),
China Finance 40 Forum, "What are the highlights and concerns of the third quarter economic data? Will the next step be monetary or fiscal? (三季度经济数据有哪些亮点和隐忧?下一步发力靠货币还是财政?)", October 20, 2020,

2 Wu Ge et al, "How long will the strong exports last? (强势出口到何时?)", China Finance 40 Forum, November 26, 2020,
3 These views are attributed to some Chinese economists by Zhu He, "Where do the three divergences in the current round of China's economic recovery come from? (本轮中国经济复苏的三个分歧从何而来?)", November 21, 2020,
4 Yu Yongding’s Interview by China Finance 40 Forum "What are the highlights and concerns of the third quarter economic data? Will the next step be monetary or fiscal? (三季度经济数据有哪些亮点和隐忧?下一步发力靠货币还是财政?)", October 20, 2020,


Copyright: Hector RETAMAL / AFP


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