Staff members make protective clothing and other Epidemic prevention materials at a strategic public health materials production and reserve base in Shenzhen, Guangdong province.
China’s economy is recovering rapidly after the epidemic, but scholars are warning that China’s service sector is still far from a true recovery and that the recovery has triggered a wider structural deterioration after years of shifting the economy from exports and investment to consumption. In addition, the continued impact of the epidemic will lead to a gradual deterioration in the assets and liabilities of all types of businesses over Time.
This recovery in China is still based on a large stimulus program combined with virus control measures to restore jobs and other economic activity, but so far most of the spending has come from the public sector rather than private businesses, according to an article by Kim Keh Yu, professor of economics at the London School of Economics and Political Science. In addition, data released recently show that China’s economic rebound after the New Crown (CCP virus) outbreak has been driven mostly by investment in infrastructure and housing, while consumption growth has not picked up, a far cry from the pre-crisis trend.
While people can safely return to the normalcy of Life, the service sector is still far from a true recovery, the article says. Out of caution, people are spending less and saving more. This trend is not only bad for China, but also for the rest of the world.
There are at least three other factors to watch, the article says. First, although China’s export numbers are beating expectations, they could disappoint in 2021. Since part of China’s current growth is driven by exports of epidemic-essential products (such as masks) to the rest of the world, its positive trade statistics reflect not a recovery in global demand, but a shift in production to China. This process will be reversed once factories restart around the world and supply chains start operating again.
A second concern is that after years of shifting the economy from exports and investment to consumption, the recovery has triggered a broader structural deterioration. While China has made some progress in recent years in structurally shifting its economy, the focus has now shifted back to investment and trade as supply has overwhelmed growth during the recovery.
China’s macroeconomic recovery thus masks many challenges at the micro level. income growth has not yet recovered in the third quarter of 2020, and household disposable income is shrinking. The demand for migrant workers has been particularly hard hit.
A third factor of concern is the gradual accentuation of various financial risks, this time originating in the real economy. The assets and liabilities of companies of all types (especially small and medium-sized enterprises) will gradually deteriorate over time. the gap between corporate borrowing and savings has reached an unprecedented level of over RMB 10 trillion in the first half of 2020.
If cash flows remain depressed for a prolonged period of time, the risk of bad debt will increase, especially in the transportation, travel and restaurant sectors. Such debt will pose a threat to financial institutions as the quality of bank assets (and therefore loan portfolios) decline.
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