By contrast, we now estimate that China’s retail market will decline by 2.9% in 2020, which is relatively close to our Q2 estimate that spending would decline by 4.0% this year. This equates to a decline from $5.283 trillion in 2019 to $5.130 trillion in 2020. Meaning that, against all odds, the US will widen its lead on China this year, rather than lose it.
Overall, China’s economic recovery outperformed expectations, but very little of that boost trickled to retail sales. In the US, meanwhile, the economy tanked as expected, but retail spending somehow expanded.
So, what happened?
These contradictory results illuminate the fundamental structural differences between how the US and China run their respective economies. The final figures also speak to the very different ways that the two governments went about trying to rescue their countries from economic disaster in 2020. Reader, beware: We’re going to get a little wonky here.
China Focuses on Supply, Not Demand
In China, the economic development model is oriented around investment, construction, manufacturing, infrastructure build-outs, real estate development, and giant state-owned (or state-directed) enterprises that undertake projects in service of these goals. Therefore, in times of economic stress, China’s best bet is generally to juice investment activity by major corporate players by implementing policies that help energize these constituencies.
This is what happened in 2020: China’s recovery and stimulus packages centered on supporting strained businesses rather than struggling households or individuals. Beijing’s policymakers concentrated on:
- Cutting business taxes.
- Reducing regulatory fees.
- Lowering interest rates for small and medium-sized enterprises.
- Creating new tax exemptions.
- Waiving contribution requirements for social welfare funds.
- Lowering prices for business inputs like local utility costs.
Central bank regulators also worked hard to buttress the finances of overwhelmed local and provincial governments, who in turn were obligated to use new instruments like localized “special-purpose bonds” to fund the same set of supply-side stimulus activities prioritized by the national leadership.
Collectively, this set of stimuli successfully pulled China’s economy out of its historically bad Q1 rut. In Q1, China reported its GDP declined by 6.8% year over year. However, by Q2, the tables had already flipped to positive growth of 3.2%. By Q3, China posted 4.9% growth. And in Q4, the nation will likely return to growth rates approaching its 2019 trend lines.
This all sounds great, but what these policies didn’t do was put money in the pockets of regular people. China’s unemployment insurance, for instance, is so minimal as to be nearly inconsequential by global standards. Beijing sent no stimulus checks to households or individuals either. And migrant laborers who lost their jobs received little support that may have lead them to maintain their consumption habits.
While China did marginally enhance social benefits for these vulnerable groups during the crisis, those increases were coming from such a low base that they did not make much of a difference. As a result, household spending languished and did not bounce back nearly as quickly as the rest of the economy. China’s retail figures finally turned positive in August, many months after GDP had turned around.