On Thursday, China reported that its gross domestic product grew 7.9% in the second quarter of 2021 compared to last year, a steep decline from China’s staggering first quarter year-on-year growth of 18.3%.
The GDP figure aligns with analyst estimates of 8% growth for the second quarter and shows that China’s economy is steadily recovering from the pandemic. At the same time, it signals that China’s post-lockdown bonanza is starting to level off.
Consistently strong industrial activity and robust exports are driving China’s continued growth and helping it maintain its status as the ‘factory of the world’ as other COVID-stricken countries struggle to compete. But a slow rebound in consumer demand and weak unemployment figures also reveal that China is headed for a broad-based, if slightly uneven, recovery from the pandemic.
The pandemic factory
In the second quarter, China defied forecasts that its export and industrial-spurred growth would slow down, suggesting China picked up industrial slack from competitor countries plagued with new COVID outbreaks.
The value of China’s industrial enterprises grew 8.9% in the second quarter compared to last year. The 8.3% growth in June topped expectations; analysts had projected a 7.8% uptick.
Even more telling is the boom in China’s industrial utilization rate, a figure that reflects how much industrial capacity is being used at a given point in time, says Bo Zhuang, chief China economist at TS Lombard.
TS Lombard data shows that in the second quarter, China’s industrial utilization rate reached 78.4%, the highest level in at least a decade.
“China’s factories are running at a record high levels” due to high demand for Chinese exports in places like the U.S. and Europe, says Zhuang. In the second quarter, Chinese exports rose 28.1% compared to last year, according to the National Bureau of Statistics.
In recent months, other production centers in Asia, including Malaysia, Indonesia, Thailand, Taiwan and the Philippines, have battled fresh waves of COVID-19.
“All these emerging markets were competing with China, but now these countries are having trouble continuing to supply markets like the U.S. and Europe,” says Zhuang.
Still, economists expect China’s industrial and export figures to trail off in the latter part of this year.
Bruce Pang, macro and strategy research head at China Renaissance Securities, explained that the demand for Chinese goods may fall as the U.S. and Europe continue to reopen and people spend more money in restaurants and on other services rather than goods.
“If we consider the reopening of other major economies, we may see a rebalancing of global demand from goods to services,” he said.
He also said that the value of Chinese exports and manufacturing is partially inflated due to high commodity prices, which are expected to fall in the latter half of the year.
“The export data is very strong, but it is not sustainable,” Pang added.
Consumer demand, fresh graduates
China’s shoppers are also showing signs of resilience, but not at the level needed for consumer spending to return to pre-pandemic growth rates.
In the second quarter, retail sales in China increased 13.9% year-over-year. June retail sales rose 12.1% from the previous year and were up 0.7% from May.
Larry Hu, chief China economist at Macquarie Group in Hong Kong, cautioned that China’s two-year average growth rate in retail sales is 4.5%, down from pre-pandemic growth rates of 8%.
“Consumer demand is recovering slowly but whether it’s going to come back to pre-COVID growth is hard to say,” says Hu.
At the same time, China’s unemployment figures point to potential underlying weakness in China’s recovery—especially among recent graduates.
In June, China’s urban unemployment rate was 5%, a slight improvement from last June’s 5.7% but unchanged from the previous month.
Pang said that the unemployment figure for the age range that includes new college graduates is particularly concerning.
In the second quarter, the unemployment rate of people between ages 16 and 24 was 15.4%, up from 13.6% in the first quarter. (The metric was not included in last year’s second-quarter release.)
“This year there are over 9 million university graduates in 2021 compared to just over 8 million graduates last year. Some of the graduates, if not most of them, are exposed to employment risk,” Pang said.
Zhuang was more optimistic, saying that the figures may not account for fresh graduates that took jobs after the survey was conducted.
Ultimately, Hu says he expects China’s economy to expand by 8.5% in 2021, roughly in line with the second quarter figures.
“The Chinese economy still looks pretty resilient at this stage,” says Hu.
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