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Super fast recovery of China’s economy | Economist

Manto China Tourists flocked to the sprawling Taihao Mausoleum in Henan province during the recent Lunar New Year holiday. Many enjoyed patting a statue of Qin Hui, a scheming official of the Song Dynasty notorious for framing military heroes. A visitor gets carried away and hits the statue with the lid of the censer. Emotions were running high after taking on Qin’s villain role in the new film “Man Jiang Hong,” which topped the box office during the holiday season.

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The frenzy of moviegoing, touring and patting at statues is a testament to the surprisingly quick recovery in consumption in the world’s second-largest economy. The mausoleum said it received 300,000 visitors during the festive period, the most in three years. Box office receipts are not only better than last year, but also higher than the year before covid-19 hit. A Chinese population that until recently underwent mass screening is now gathering in front of screens.

The recovery was earlier than expected due to the faster spread of the virus. Infections appear to have passed very quickly since China hastily abandoned its zero-coronavirus regime. State epidemiologists estimate that at least 80% of the population has been infected with the disease. Hospital admissions peaked on January 5, according to official figures. A second wave of infections is expected after holiday travel spread the disease from cities to villages. But the virus beat the holiday rush. The worrisome second wave appears to have merged with the first, according to life sciences data company Airfinity.

While the death toll from all these infections is unclear, the economic consequences are becoming clearer. China’s service economy is coming back to life as people contract and recover from the virus. The index of activity outside of manufacturing jumped to 54.4 in January from 41.6 in December, the second-largest jump on record, according to the monthly survey of purchasing managers. Bank of America’s Xiaoqing Pi and Helen Qiao pointed to a sharp increase in activity in “coronavirus-hit” services such as retail, accommodation and restaurants.

On the e-commerce platform Meituan-Dianping, waiting lists for some restaurants have grown to 1,000 tables.people are used to queuing polymerase chain reaction Tests now await prayers at popular temples. In Hangzhou, the capital of Zhejiang province, people gathered outside Linshun Temple at 4 a.m. to offer incense to the God of Wealth. Others who reached the summit of the spectacular Tianmen Mountain in Hunan province were reportedly forced to wait until 9 p.m. to take a cable car back. daily economic newsA national newspaper.

Can this frenetic pace continue? Optimists point to the extraordinary mobility of Chinese households.Their bank deposits are now over 120 yuan ($18trn), more than 100% of what they were last year gross domestic product, which was $13 trillion more than expected given pre-pandemic trends, according to Citigroup. These deposits could provide ammunition for a round of “retaliatory spending.”

However, the ammunition may be set aside for other uses. Many are stressed families keeping money in the bank rather than buying property or putting it into mutual funds. They are now less likely to splurge it on goods and services. A round of “retaliatory risk-taking” is more likely, according to Citigroup, as households feel confident buying less-safe assets that could offer better returns than bank deposits. That would boost financial markets and provide a much-needed boost to real estate.

So perhaps a more accurate way to assess the coming spending boom is to look at the gap between household income and consumer spending. In the three years before the pandemic, households saved 30% of their disposable income. During the pandemic, they saved 33%. The cumulative result of this additional savings is about $4.9trn. If consumers added it to their spending this year, they would spend 14% more (before adjusting for inflation).

The exact size of the spree will ultimately depend on broader economic conditions. Real estate prices fell and the job market softened. Youth unemployment remains above 16%. But China’s labor market has bounced back quickly after previous setbacks from the pandemic, with unemployed youth accounting for only about 1% of the urban workforce. With any luck, some extra spending will lead to higher sales and stronger hiring, spurring additional spending. All of this means that consumption is likely to account for the lion’s share of China’s economic growth this year: almost 80% when government spending on services is included, according to Citigroup. That would be the highest share in more than two decades.

China’s profligacy will be a welcome contribution to global growth.according to International Monetary FundForecasts released on Jan. 30 showed the country’s economy would grow 5.2 percent this year, accounting for two-fifths of the world’s growth. The United States and the euro zone combined contributed less than a fifth.

A recent study by economists at the U.S. Federal Reserve makes a fundamental point, with the title: “What Happens in China Doesn’t Stay in China.”Their estimates suggest that the policy-induced expansion of the Chinese economy gross domestic product 1% increases the rest of the world by about 0.25% gross domestic product After one or two years. The authors did not examine the spillover effects of China’s reopening. But their results give some indication of possible consequences. If China’s reopening boosts domestic growth from 3% to 5-6% this year, the spillover effect could be 0.5-0.75% to the rest of the world gross domestic productat an annual rate of approximately US$400 billion to US$600 billion.

However, the pick-up in global growth is not purely good. Central banks are still struggling to curb inflation. If higher Chinese demand adds to price pressures, policymakers may feel the need to slow growth by raising interest rates or delaying cuts. Federal Reserve Vice Chairman Lael Brainard noted that China’s abandonment of zero outbreaks has uncertain implications for global demand and inflation, especially in commodities. European Central Bank President Christine Lagarde warned that the reversal would increase “inflationary pressures” as China consumes more energy. According to another bank, Goldman Sachs, the reopening could add $15-$21 to a barrel of Brent crude, which is currently trading around $85.

After the 1997 Asian financial crisis, the Chinese economy helped stabilize the region. After the global financial crisis a decade later, China’s growth helped stabilize the world. This year, it will once again make the biggest contribution to global growth. However, whereas in the past China’s contribution came from investment spending, now consumption will play a leading role. Chinese consumers, who have traditionally been modest, are about to strike hard.

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