We must try to learn from China – their economy is larger now than it was before the virus struck

We do not need to lose our self-confidence in the way we run our economies. But we do have more to learn, writes Hamish McRae

China has come through this pandemic better than the US (EPA)

It looks very much as though China will emerge the big economic winner from the Covid-19 crisis.

It is galling to have to acknowledge this, given that the country was slow to report the severity of the crisis and the origins of the virus remain unclear. It is also troubling for those of us who believe that representative democracy, for all its roughness, is more likely to bring prosperity and decency to most people’s lives than an autocratic government such as that of China.

It is particularly troubling for Americans right now because, whoever wins the presidential election, the new administration will have to start from the position that China has come through this one better than the US and will have to ask why that has happened.

Some facts. Back in the spring, the IMF forecast that China would grow by 1 per cent this year and the US would shrink by 8 per cent. (The UK and eurozone were both expected to shrink by 10 per cent). It looks now as though China may do somewhat better than that, with the World Bank forecasting it will grow by 2 per cent. The US may do better too, with the Federal Reserve forecasting growth would be minus 3.7 per cent this year. But that still leaves a six point gap in performance between the two countries. In 2019 the cap was only four points: China grew by 6.1 per cent, the US by 2.3 per cent. So China has sped up the pace at which it is overhauling the US and remains set to pass it in economic size in about 10 years’ time.

How has China managed to recover so well? It has done what it did after the financial crash of 2008/9, which was investing on a massive scale. Consumer demand did initially fall, so it offset that by piling money into all forms of investment: housing, roads, power stations, loans to small and medium-sized businesses and so on. As a result, alone among the world’s big economies, China did not have a recession in 2009.

It seems to have worked again. Enodo Economics, a London-based consultancy that specialises in China, calculates that China has already recouped the ground lost in the first quarter of the year. The rest of us are all struggling to do the same but the Chinese economy is already larger now than it was before the virus struck.

So what does this mean for the US, and indeed for the rest of us? Well, I think we have to accept that economies where the state has a high degree of control can offset the downs of the economic cycle more effectively than market economies. Obviously you can build things faster if you don’t have to worry about planning controls and local opposition. If the UK operated under the Chinese system, we would have that third runway at Heathrow by now. Working from home has also been strongly discouraged.

But it is not just that. Chinese citizens save a lot, for cultural and other reasons, and consume a much smaller proportion of their income. Personal consumption in China is under 40 per cent of GDP; in the US it is 68 per cent. So there are more savings that can be funnelled into investment, and if needs be, people can be urged to spend some of those savings on consumer goods too.  

However, what works in the short run may work less well in the long. China is growing rapidly now for several reasons, including the ready supply of labour still moving from the land. It is able to apply technologies developed in the West, sometimes directly copying them. And it is a huge market. But as the population ages and starts to shrink (that one-child policy) the economy will become less vibrant. Further, just as you can have too little investment, you can also have too much. There are a lot of empty flats on the outskirts of Chinese cities, built as part of the recovery programme after the banking crash, where no one now needs to live.

So we do not need to lose our self-confidence in the way we run our economies. There are long-term costs in the China economic model that will become more evident as the years go by. What we should do is try to learn from China’s impressive economic recovery – what it has done well and what it has done less well. Then we should take those lessons, knuckle down, and apply them.