This is a preview of Periscope—a weekly report by KrASIA, delving into some of China’s industries and markets. We discuss a different space each week and include highlights of relevant top stories. If you would like to read the report in full and access our library, please click here.
Enough has been said about how COVID-19 created an unprecedented economic slowdown. There is light at the tunnel as 2020 draws to an end, and the global economy appears to get back on its feet. The workforce and manufacturing sector have resumed activity as China gains control over the pandemic. Since Q2 2020, the long-term outlook for the economy is clear of headwinds.
But these preliminary indications of recovery belie deeper fears of its sustainability. There may be deep-seated problems embedded in the economy that could threaten a future recovery even if short-term gains exist. Let’s take a look at three of the main concerns.
Risking leverage and debt risk
China’s macro-leverage ratio rose 21% from 245.4% in 2019 to 266.4% by H1 2020, triggering concerns about debt risk in the market. However, one could suggest that the increase in this ratio occurred due to the countercyclical and temporary emergency easing measures implemented in response to the pandemic. This echoes policy decisions made in the aftermath of the 2008 Global Financial Crisis, where leverage increased by 31.8%. China’s overall level of debt had also remained within normal levels, suggesting that the increased leverage could be largely attributed to the sharp decline in Gross Domestic Product (GDP) over the year.
Decreased consumption and economic recovery
Despite signs of economic recovery in China, there remains pessimism over the lower consumer demand—after all, investments have recovered much more significantly than consumption. As of September 2020, investment growth has returned to positive territory with 0.8%, whereas consumption still falters at -7.2%. As domestic consumption remains in the red, the markets questions the sustainability of the economic recovery, although some signs indicate otherwise.
Artificial growth arising from COVID-19
There are also valid concerns that China’s GDP growth could have been supported by expenditure related to the pandemic. The rise in demand for medical equipment, textile yarns, and plastic components of other key resources have led to the expansion of China’s export growth rate.