China's Economic Resilience

China's V-shaped economic recovery continued for a fourth consecutive month in June, led by strong domestic demand. If COVID-19 remains under control, China can remain the world's best consumer story.

On the 19th anniversary of the publication of “The Coming Collapse of China,” it is worth noting the resilience of the Chinese economy, which has survived the Global Financial Crisis, the Trump tariffs and now the coronavirus. In 2001, author Gordon G. Chang forecasted that China's “economy, and the government, will collapse. We are not far from that time.” Instead, last year China accounted for 40% of global economic growth, larger than the combined contributions to global growth of the U.S., EU and Japan, according to IMF data.

All of us at Matthews Asia send our sympathies to everyone effected by COVID-19, either directly or indirectly, and we extend our gratitude to all health care professionals, scientists and service providers who are diligently working to help and provide care to those in need around the world.

An ongoing V-shaped recovery

In April, we noted that China's first quarter macro data was the weakest since the Tang Dynasty. We also pointed out that across most of China, life began slowly returning to normal in the second half of March, leading to signs of a nascent recovery in that month's data. That recovery continued to strengthen during the second quarter.

China's economy is increasingly driven by domestic demand, so it is important that consumer spending has continued to bounce back. Last year was the eighth consecutive year in which the consumer and services (or tertiary) part of China's GDP was the largest part. Although consumer spending is likely to remain softer than usual until next year, on a relative basis China is likely to remain the world's best consumer story.

Consumer spending back strongly

Inflation-adjusted (real) retail sales plummeted to a 23.7% year-over-year (YoY) decline in January/February, during the peak of China's COVID-19 outbreak, but was down only 2.9% in June. A healthy recovery, but not yet back to normal: in June 2019, real retail sales rose 7.9% YoY.

Auto sales rose at the second fastest YoY pace since January 2018, with sales up 11.6% in June, after rising 14.5% YoY in May, in contrast to a decline of 79.1% YoY in February.

This is consistent with data reported by several publicly traded global car makers. BMW's 2Q China car sales rose 17% YoY, while their sales fell 40% in the U.S. and declined 46% in Europe. Mercedes-Benz said it's “best second quarter to date in China shows the impressive speed at which demand is currently recovering in our largest market.” Toyota's June sales in China rose 22.8% YoY, while Ford said its 2Q vehicle sales rose 3% YoY, its first quarterly sales rise in China in almost three years. Of course, not every carmaker had success: GM said its 2Q sales in China fell 5.3%.

Residential property sales also continued their strong recovery last month. After being down 39.2% YoY (in square meter terms), in January/February, sales rose 4%, following a 9.3% rise in May. (In June 2019, sales fell 1.8%.)

It is worth remembering that the overwhelming majority of new home buyers in China are owner-occupiers, who are required by regulation to make a cash down-payment of at least 20% of the purchase price. A July study by the China Quantitative Insight (CQi) team at Credit Suisse found that investors accounted for less than 20% of buyers across the country.