By Nathaniel Taplin
By the terrible standards of 2020, China's 2.3% growth stands out. That sets the country up well for a strong 2021, before some familiar challenges reassert themselves.
Official full-year figures released Monday confirmed that China's economy is firmly on the mend, having performed impressively in the worst year for the global economy in recent memory.
This is partly because China handled the pandemic well, after initial missteps. But it was also lucky, both with its business cycle and because its key export industry, electronics, happened to uniquely benefit from pandemic-related demand in rich countries.
Although it wasn't broadly appreciated at the time, China's economy was already perking up in late 2019 due to the reviving fortunes of two of its largest, most labor-intensive manufacturing sectors: electronics and automobiles. Electronics in particular were boosted first by rebounding global smartphone shipments and then supercharged by demand for stay-at-home goods.
Profits in electronics and autos logged their strongest performances last year since 2017, growing 15.7% and 7.2%, respectively, in the first 11 months of the year compared with the same period in 2019. In contrast, overall industrial profits were up 2.4%.
The first half of 2021 seems certain to be strong as developed countries struggle to vaccinate their populaces and China's own moderately sized stimulus feeds through. However, as the rich world starts spending more on services again, Chinese exports may flag. Back at home, many of China's urban car markets are well saturated--in part thanks to previous, generous government stimulus programs--meaning the auto industry won't fully pick up the slack.
By late 2021 more fundamental headwinds--including a declining labor force, weakening productivity growth and rapidly rising consumer indebtedness--might become more obvious again.
To be sure, China is making useful changes, such as raising the retirement age, easing restrictions on population movements, and making bankruptcy and intellectual property courts more efficient.
But because the state's share of total investment keeps creeping upward, the cumulative effect of these changes will have to be large indeed to maintain overall growth. And signs of progress can be overstated. For example, rising bankruptcy numbers appear to reflect difficult times for private businesses as much as increased administrative efficiency.
That means that if 2022 is a more normal year, full-year growth might be just 5% or 6%, not the roughly 8% consensus for this year. It is always tempting to extrapolate in straight lines, particularly when Chinese economic power is so clearly in full flood. But economies rarely move in straight lines for long--and floods, by definition, don't last.
Write to Nathaniel Taplin at nathaniel.taplin@wsj.com
(END) Dow Jones Newswires
01-18-21 0544ET
