COVID-era exports are fueling China’s economic recovery. What happens when the pandemic ends?

December 13, 2020, 10:30 AM UTC

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The coronavirus pandemic mauled the global economy in 2020, but China is a big exception. The first country to experience a COVID-19 outbreak, China also became the first country to reopen, giving the Chinese economy a head start on recovery.

Global gross domestic product will decline 3.5% this year. The U.S. GDP is expected to shrink 3.5%, while Europe’s will crater 7.2%, according to Morgan Stanley. China, meanwhile, is projected to log positive GDP growth for 2020—2.3% for the year, according to Morgan Stanley—making it an outlier among major economies.

“China has done remarkably well,” Wei Sun Christianson, chief executive of Morgan Stanley China and co-chief executive of Morgan Stanley Asia Pacific, said at the Fortune China Most Powerful Women summit in Shanghai on Thursday.

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In the second quarter of the year, when most countries were still in the thick of quarantines and first big waves of the virus, China’s factories were resuming production and its cities were emerging from lockdown, giving the economy a much-needed boost. After recording a 6.8% GDP contraction in the first quarter year-on-year, China’s economy made a sharp U-turn and returned to 3.2% growth in the second quarter. In the third quarter, China’s GDP surged 4.9%.

Demand for pandemic-related products fueled the exports responsible for much of China’s economic uptick this year. Medical device exports soared 46% in the first six months of 2020, textile exports—including face masks—jumped 32%, and notebook computer exports grew 9.1% in the same period, reflecting a global shift to work from home and remote schooling.

Morgan Stanley expects China’s GDP growth to reach 9% next year and stabilize at 5.4% in 2022, but those years will likely see a drop-off in pandemic-era demand, meaning growth will have to come from elsewhere.

After the pandemic, a trend Morgan Stanley dubs “urbanization 2.0”—the proliferation of regional clusters of cities into “supercities,” like Southern China’s Greater Bay Area, and their widespread use of smart city tech—will be an important economic driver, Christianson said.

This phase of urbanization, Christianson said, will create “bigger and faster and more livable cities, and people are going to consume more, so it will actually impact consumption in the end.”

A growing influx of foreign direct investment will also drive China’s post-pandemic economy, said Christianson. FDI sank at the beginning of 2020 because of the coronavirus, but FDI levels are rebounding alongside the country’s wider economic recovery.

China is loosening its financial market regulations for foreign investors. This week, Goldman Sachs said it was in the process of acquiring 100% ownership of its China joint venture, which would make it the first Wall Street bank with full control of a mainland securities firm.

Morgan Stanley is “a big beneficiary of that opening up,” Christianson said. She called the firm increasing ownership of its China securities and asset management businesses from the current 51% to 100% “a game changer.”