Markets & Research
As the world looks to a future after COVID-19, China gets an early start

Beyond its terrible toll on public health and personal lives, COVID-19 has pulled down economies around the world. But in recent weeks, a handful of nations appear to have arrested the disease’s spread, giving us a glimpse of what an economic recovery might look like in a post-COVID-19 world. Among those countries is China, where the virus initially took hold.

Economic conditions have clearly improved in the world’s second-largest economy. GDP rose 3.2% in the second quarter — modest by pre-coronavirus standards but better than many other countries, which are grappling with recession. To be sure, China still faces stiff headwinds and will need time to recover even if no other large outbreak happens. The country’s aggressive lockdown pounded its economy, exacerbated income inequality and hurt consumer spending power. And old fights didn’t disappear: Trade disputes still weigh on China’s international relationships.

Yet there are good reasons to expect China will overcome those hurdles. Many of its homegrown companies are leaders in their industries, and they come from an array of fields. China’s middle class is starting to recover and has plenty of room to expand. And the country’s growing private sector has shown quite an appetite to adapt to international business standards.

“Once we’ve returned to a more normal situation — and yes, I am assuming there will be a post-coronavirus world — I expect China will continue to grow,” says Steve Watson, a portfolio manager at Capital Group Private Client Services.

China combines new strengths with old ones.

Manufacturing has long been the backbone of China’s economy, and it remains a key component. But the country’s industries are far more diverse now, providing a potential source of stability during international tensions. Local companies have become important players in industries such as e-commerce, entertainment, technology and pharmaceutical research.

“If the pandemic were happening 10 years ago, when China was far more reliant on exports, I think we would have considerably more concern about the course of its economy,” Watson says. “But things move on, the world moves on, and China has moved on substantially.”

The ongoing evolution of Chinese consumers creates opportunity, says Stephen Green, a Capital Group economist.

“Before, as a company doing business in China, you would build a factory,” Green says. “Now you build a retail outlet or you build your relationship with one of the tech companies to sell online. It used to be about exports. Now it’s all about selling to the Chinese consumer.”

Indeed, China’s burgeoning middle class has been eager to buy, spending on property and automobiles, pursuing higher degrees, investing in stocks and consuming high-end goods and technology. Even after years of expansion, this cohort is likely to grow further, Green says, noting that 10% to 20% of China’s population could move from the countryside to cities in the next several years.

Of course, the country’s middle class isn’t likely to expand as explosively as it did in recent years, he says. And in the near term, the pandemic has caused a lot of pain. Surveys show that many consumers have lost income due to COVID-19 and that households have trimmed expenses.

Chart showing spike in covid-19 cases in Feb and China and then flattening

But even with cutbacks, domestic demand remains promising, Watson notes. The country’s nascent private sector is stepping in to meet that need, with the labor force increasingly working outside of state-owned enterprises. That expansion brings a real hunger for outside investment.

“It has become easier for us to invest in China’s domestic stock market,” Watson explains. “And we’re doing it more directly. Instead of investing offshore, in places like Hong Kong, we’re more likely to be investing on the mainland, in exchanges in Shanghai or Shenzhen. China welcomes foreign capital.”

To meet investors’ expectations, Chinese companies are hewing more closely to international business standards.

“Simply put, they want to be equal players and to be regarded as such on the global economic stage,” Watson says.

Daily life still flows around the threat of COVID-19.

The pandemic remains top of mind for many people in China, but between the limited flare-ups and the decisive government response, confidence seems to be growing, Green says: “The attitude seems to be ‘Every day that goes by is better.’ ”

Certainly, daily life hasn’t yet returned to normal, with global travel largely off the table and many consumer data points down year over year. And old sources of tension still cause worry.

“The U.S.-China trade dispute is really freaking people out,” Green says. For many Chinese, particularly older people, reopening to the West marked a period of greater stability and economic growth. There is fear that disputes with the U.S. could signal a step backward.

“It’s my wish that cool heads prevail in this conflict,” Watson says. “I think the tension between the U.S. and China is unnecessary. I’ve been living in greater China now for 20 years, and I’ve been observing it up close since 1981, when I first visited. I have a tremendous respect for the country. Don’t get me wrong, the nation faces many issues. But I think the tensions are largely unnecessary.”

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