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China's Economy Regains Strength After Strict Coronavirus Measures

07/03/2020 | 07:09am EST

By Jonathan Cheng

BEIJING--Economic activity is gathering momentum in China, a raft of survey data showed this week, the latest sign that Beijing's uncompromising approach to tackling the coronavirus pandemic is starting to pay dividends even as the U.S. shuts down swaths of its economy in a struggle to contain the virus.

A private gauge of China's service-sector activity, released Friday, surged in June to its highest level in more than a decade, as the easing of virus-control measures in most parts of the country drove consumer demand. The Caixin China services purchasing managers index jumped to 58.4 in June from 55.0 in May, Caixin Media Co. and research firm IHS Markit said Friday.

June's reading came in far above the 50 mark that separates expansion from contraction, signaling rapid month-over-month recovery. While China's economy is quickly picking up steam, the actual level of activity remains far below pre-virus levels.

In February, the Caixin services survey plunged to a historic low of 26.5, suggesting a dramatic pullback in activity in China's service sector. The reading remained deep in contractionary territory for two more months before crawling back into expansion in May.

The strong rebound in services was in line with a trio of other data points reported earlier in the week. The government's official index of nonmanufacturing activity, released Tuesday, jumped to a seven-month high in June, while the official manufacturing PMI survey reached a three-month high. Caixin and IHS Markit's measure of manufacturing activity in June hit a six-month high.

Taken together, the readings suggest that China's firm handling of the coronavirus pandemic has restored enough confidence to allow the economy to gather momentum, raising hopes for a full recovery later this year.

While painful in the short term, China's strategy of stamping out the coronavirus before attempting a major reopening of the economy is beginning to look like the right decision, said Ding Shuang, a Hong Kong-based economist with Standard Chartered--especially compared with the U.S.'s attempts to restart business activity without having tamed the virus's spread.

Given the uncertainties around the timing and efficacy of vaccine development for the coronavirus, "the advantage of this approach I should say is fairly obvious," said Mr. Ding.

In recent days, many U.S. states have been forced to reverse course and shut down restaurants and bars and require face coverings in public settings as new daily infections surpassed 50,000 on Wednesday for the first time.

The new wave of coronavirus infections and restrictions on business activity threatens to throw a nascent recovery off course, after the U.S. on Thursday reported a second straight monthly drop in the jobless rate in June.

In China, meantime, health authorities have aggressively at tacked even small outbreaks as they emerge across the country. The most recent cluster, which broke out at Beijing's largest wholesale food market last month, prompted a swift and vigorous response from the local government, including the testing of millions of citizens and new restrictions on people's movements in and out of the capital.

On Friday, Chinese health authorities reported just two new locally transmitted infections in the country for the previous day, both of them in Beijing.

China's experience with the economic pain wrought 17 years ago by severe acute respiratory syndrome, or SARS, prompted authorities to adopt forceful and systematic administrative measures to prevent the spread of infection, thus laying the foundation for recent months' accelerating economic recovery, Mr. Ding said.

The Chinese economic data released on Friday showed the number of total new businesses rising at the sharpest rate since August 2010, as service providers made plans for increases in consumer demand in the coming months, Caixin said.

The recovery in demand from end users is particularly encouraging since the country's economic recovery since March has been driven mostly by increased production as Beijing pushed for the resumption of work across the country.

Even as periodic outbreaks across China have prompted local authorities to impose new restrictions, the country as a whole has seen its economic recovery proceed largely unimpeded, buoying economists' expectations for a full-fledged return to normal in the second half of the year.

Sporadic outbreaks in China shouldn't derail its economic recovery, said Lian Ping, an economist at Zhixin Investment Research Institute. The Shanghai-based economist is forecasting year-over-year economic growth of more than 6% in the latter half of 2020--roughly in line with the 6.1% gross domestic product growth rate China reported in 2019.

In the first quarter of this year, China suffered a 6.8% contraction in GDP, its first such pullback in more than four decades.

"As long as the overall situation is under control, a few outbreaks here and there won't become big waves," Mr. Lian said.

The International Monetary Fund, in its latest economic-outlook update last week, predicted China would be the only major world economy to expand this year, forecasting growth of 1%.

Despite the generally brighter outlook, sentiment around hiring remains weak, this week's purchasing managers' surveys showed. Economists worry that persistent employment pressure in China, including a historically large college graduating class and tens of millions of unemployed migrant workers, as well as economic uncertainty in the U.S.--a major customer for Chinese goods--could yet hamstring China's longer-term recovery.

Those challenges leave little room for Beijing policy makers to unwind coronavirus-related easing measures, said Standard Chartered's Mr. Ding.

Earlier this week, China's central bank said that it would cut lending rates for small firms and rural borrowers, its latest effort to guide down borrowing rates.

Liyan Qi and Bingyan Wang contributed to this article.


Stocks mentioned in the article
ChangeLast1st jan.
IHS MARKIT LTD. -0.67% 88.09 Delayed Quote.-1.94%
SHANGHAI STOCK EXCHANGE B SHARES INDEX -0.66% 249.5492 Real-time Quote.2.49%
STANDARD CHARTERED PLC -2.04% 461.9 Delayed Quote.-0.86%
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