China's Q2 2020 GDP growth driven by the West's work from home trend

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While much of the West has been working from home amid the coronavirus pandemic, China’s labor force has returned to factories—ramping up exports of electronics to feed the needs of a rising class of remote workers.

“Export growth is so much stronger than anyone could have expected,” said TS Lombard’s chief China economist, Bo Zhuang. Exports of “work from home” gadgets such as laptops, webcams, and even gaming consoles increased during the second quarter. “These are high–value-added products,” Zhuang said.

According to data released Thursday by the National Bureau of Statistics (NBS), China’s economy returned to growth in the second quarter of this year, jumping 3.2% over the same period last year and exceeding the 2.5% predicted by a Reuters poll of economists.

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China’s return to growth, from a 6.8% contraction in the first quarter of 2020, was driven by the surprising strength of exports, which, on paper, may not seem so impressive. Year over year, exports increased only 0.3%. But considering that some analysts predicted the figure would be closer to –25%, Zhuang says, the turnaround is incredible.

According to China’s customs office, exports of notebook computers increased 9.1% in the first half of the year, with the gains made almost entirely in the second quarter. The export of medical equipment has also skyrocketed. In the first six months, exports of “medical devices” increased 46%. Exports of textiles, which includes surgical masks, increased 32% as factories restructured to meet surging demand.

“People underestimate the ability of China to pivot,” Zhuang said, pointing to the slight contraction in China’s unemployment rate in June—down 0.2 percentage points from 5.9% in May. “Because labor deployment has been quite flexible, China has managed to avoid the mass layoffs we feared,” he said.

Apart from medical supplies and electronics, however, the rest of China’s exports have remained quite weak. In fact, the 3.5% year-over-year growth in GDP belies an enduring weakness across China’s industrial sectors.

Data from NBS shows the total value added of the manufacturing and services sectors decreased 1.9% and 1.6% year over year, respectively. The primary sector—including agriculture and mining—grew only 0.9%. To an extent, Zhuang says, the second-quarter growth figure is reflective of gains China made in the third and fourth quarters last year. The economy had already grown far enough in the second half of 2019 to remain ahead now, despite the massive downturn in the first quarter of this year.

“Besides exports, China’s GDP growth was also buoyed by government investment in infrastructure,” Zhuang said, adding that the investment should make for more sustainable long-term growth—but to a limited degree. By the second half of next year, Zhuang says, China’s growth will have stabilized to 5%, a relatively slow pace for the economic powerhouse accustomed to growth in the 6% to 7% range.