China has recovered but it’s the wrong kind of recovery

Industrial production is driving the rebound

Industrial production is driving the rebound
China is an interesting counter-point to many ideas about the global economy right now. It’s essentially a COVID-free country and an entirely open economy.
From a distance, it’s recovered in a big way.
But when you drill down, it’s not quite as strong as it seems. Retail sales are down 8.6% y/y in the first 8 months of the year and were just 0.5% y/y in August.
It’s not the consumer driving the recovery.
Contrast that with:
  • Industrial production +5.6%
  • Fixed asset investment +4.16%
  • Trade surplus +19.3%
That’s not a sustainable recovery and it’s not the consumer-led economy that China’s been trying to build for the past 5 years.
China has gone back to the old playbook to stimulate growth. Perhaps that was the right thing to do but the slow consumer recovery even in a COVID-free country is worrisome.
It also sets up domestic problems for China down the road, as the FT highlights today:

China’s “recovery”, in other words, is largely an exacerbation of the problems that have long been recognised by Beijing. It is a supply-side recovery in an economy that urgently needs more domestic demand but that has found it politically very hard to manage the wealth transfers that it requires.

This recovery isn’t sustainable without a substantial transformation of the economy, and unless Beijing moves quickly to redistribute domestic income, it will require either slower growth abroad or an eventual reversal of domestic growth once Chinese debt can no longer rise fast enough to hide the domestic demand problem