China's 2020 Growth Shows It Gaining Ground on U.S. Economy

By Jonathan Cheng

BEIJING--China's geopolitical rise over the past four decades has been fueled by sizzling economic growth that regularly featured years of double-digit percentage-point gains.

In 2020, China advanced its aspirations by simply emerging with its growth intact from a brutal year when a pandemic shook the world economy.

On Monday, Beijing said its gross domestic product rose 2.3% last year. While that is the weakest annual rate of growth since the Mao era, it was enough to make China the only major world economy to gain any ground at all last year, and accelerated its likely overtaking of the U.S. economy, economists say.

The World Bank projects the global economy to have pulled back by 4.3% last year, dragged down by a 7.4% contraction in the eurozone. The U.S., the world's largest economy, is expected to have shrunk by 3.6%.

In per-capita terms, China's GDP, which surpassed $10,000 for the first time this year, remains far behind the U.S.'s $65,000. But the sheer size of its market, combined with its weathering of the worst economic downturn in memory, means that China is arguably entering the new year with a stronger hand--an advantage that leader Xi Jinping is expected to make use of after President-elect Joe Biden is sworn into office on Wednesday.

China was able to rescue its economy by aggressively moving to stamp out the virus--though only after several critical weeks in which authorities were initially slow to act as it spread in the central Chinese city of Wuhan.

By the time Western countries were hit with the first wave of infections in the spring, China's formidable factory floor was revving back up again, helped by government measures targeted at restoring industrial production. Chinese exports, together with ramped-up infrastructure spending, powered a recovery that steadily picked up steam throughout the year. Officials said last week that exports in 2020 climbed to an all-time high.

After suffering a 6.8% contraction in the first three months of the year, China's economy notched three quarters of progressively stronger gains, culminating in a 6.5% expansion in the final three months of the year, officials said Monday--putting China back on its pre-Covid-19 trajectory.

"We had a perfectly V-shaped recovery profile in China, whereas the U.S. looks more like a W," said Michael Spencer, chief Asia-Pacific economist for Deutsche Bank. "It will have taken the U.S. a year longer than China to get back to the pre-Covid path."

In getting back to normalcy well ahead of the Western world, the world's second-largest economy has gained significant ground on the U.S., while helping the globe avert what would have otherwise been an even grimmer year.

China's increase in its share of global GDP last year--1.1 percentage points--marks its largest such jump in a single year since at least the 1970s.

Forecasters now expect China's economy to grow by another 8% or more in 2021, helping put it on track to overtake the U.S. as the world's largest economy by 2028, as many as five years earlier than pre-coronavirus projections.

"China's exceptional economic performance during the pandemic has caused the gap to shrink," Axel Weber, chairman of UBS Group AG, said last week.

Mr. Weber, citing International Monetary Fund data, has moved forward his projected timeline for China's economy to reach parity with the U.S. to 2028, from an earlier forecast of 2030.

The Centre for Economics and Business Research, a London-based research firm has also moved up its forecast for the day of parity to 2028, albeit from a pre-coronavirus projection that China would surpass the U.S. in 2033.

That expedited timeline is based in part on China's robust industrial rebound last year--but, equally importantly, on Beijing refraining from joining the Federal Reserve and other global central banks as they took rates to near-zero levels.

China's higher interest rates attracted a flood of capital, buoying the yuan against the greenback and increasing the value of China's economic activity in U.S. dollar terms, said Douglas McWilliams, CEBR's deputy chairman.

More than merely bringing the size of China's economy more quickly to parity with that of the U.S., China's exceptional 2020 performance also helped the global economy as a whole.

Without China's contribution, says Homi Kharas, a senior global economics and development fellow at the Brookings Institution, the world economy would have shrunk by 5.7% last year, versus the roughly 4.3% pullback now expected by the World Bank.

Mr. Kharas, a former World Bank chief Asia economist, says that while global growth has enjoyed an average annual boost of about 0.8 percentage points from China over the past two decades, China's relative outperformance last year means that it likely lifted the global economy by "nearly double its usual contribution"--roughly 1.5 percentage points, by his calculations.

Mr. Kharas says China's 2020 expansion means the economy could eclipse the U.S.'s in size even before 2028 if the yuan continues to strengthen against the dollar.

Economists are divided over how long China's advantage will persist. Deutsche Bank's Mr. Spencer argues that the U.S. is likely to regain ground on China in the next few years as Beijing, having tackled the Covid-19 emergency, resumes its pre-pandemic campaign to rein in debt--which ballooned again in 2020.

At the same time, he expects the U.S. to enact bolder stimulus in the coming months, with a Democratic Party-controlled Congress aggressively intervening to prop up consumer spending.

"If we define recovery as getting back to the pre-Covid trajectory, China is about a year ahead of the U.S., but the stimulus will be much bigger in the U.S.," Mr. Spencer said.

In the longer run, some economists are concerned about China's reliance on less efficient state-owned enterprises to drive the recovery, a formula that the IMF has warned is dragging down China's productivity--and its longer-term economic fortunes.

For now, though, some Chinese businesses are bracing for a bumper harvest after the tumult of 2020.

In the southern Chinese metropolis and export hub of Guangzhou, Serenity Made Furniture Co., a maker of furniture for restaurants, hotels and bars, has been scrambling to keep up with a torrent of orders.

When the coronavirus first convulsed China a year ago, Serenity Made's factory was forced to shut down operations for several nerve-racking weeks. By the time China's aggressive pandemic response allowed the factory to reopen, business travel and restaurant dining had been wiped out in other parts of the world.

As clients canceled contracts and overseas orders plunged to effectively zero between mid-March and the end of May, two of Serenity Made's five salespeople quit, company director Serina Yang recalled.

In June, some countries that managed to bring the coronavirus largely under control--Australia, New Zealand and Singapore--began easing social-distancing restrictions, sparking a rebound in orders that brought business volume at Serenity Made, which employs roughly three dozen people, back to pre-coronavirus levels by August.

With many of her competitors in Southeast Asia still grappling with their own factory shutdowns and supply-chain issues, Ms. Yang was able to claw away market share, helping Serenity Made finish 2020 with sales 30% higher than the year before.

Ms. Yang hired temporary workers in the second half of 2020 to keep the company's three production lines in nearby Foshan running at full capacity.

Now, as vaccines are rolled out in the Western world, Ms. Yang is preparing for demand to double amid an expected snapback in air travel and restaurant and bar spending in the second half of the year.

"Our order book is packed," Ms. Yang said. "We are extremely confident."

Grace Zhu and Bingyan Wang contributed to this article.

Write to Jonathan Cheng at [e-mail]

(END) Dow Jones Newswires

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