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China's Economic Outlook: From the Short to the Long Term?

February 1, 2021


Alicia Garcia-Herrero, Adjunct Professor at Hong Kong University for Science and Technology (HKUST); Senior Research Fellow at Bruegel

Moderated by Michael Plummer, Director of SAIS Europe; Eni Professor of International Economics

At the end of 2020, as most of the world continued to combat massive surges of COVID-19 infection, many of the Asian countries that had first dealt with the pandemic, like the People’s Republic of China, seemed to have successfully contained infections and returned to past trends of growth and productivity. This gave rise to the idea of “first in, first out” for global economies: the first economies to have been impacted by COVID would be the first to return to normal activity. 

Garcia-Herrero began by highlighting that the region’s response, though robust, has far from rid it of COVID altogether. Many Asian countries have, like in Europe, continued to deal with virus flareups and delays to vaccine distribution – in fact, these delays have been severe enough to deter some countries, including China, from announcing concrete vaccination plans altogether. Combined with a population that, due to a robust initial response to the pandemic, has had far less immunity-building exposure to the virus than other regions, these vaccine troubles have solidified COVID as a consistent regional threat well through 2021. 

Garcia-Herrero also assessed COVID’s impact on China’s short-term economic growth in particular. Although one of the few economies demonstrating positive growth at this point in time, Chinese economic recovery has been slower than projected, due to weakened consumption (particularly of services like tourism, which continue to be threatened by potential lockdowns), income, and domestic investments. Much of the present recovery has instead been driven by exports to Europe, which had ballooned since the start of the US-China trade war and may not be sustainable. Similarly, investment growth has largely come from new overseas investments, attracted by comparatively high interest rates – however, this investment has not extended to domestic businesses, which have experienced a wave of defaults and bankruptcies even among state-owned enterprises. 

Lastly, Garcia-Herrero examined the larger structural challenges to China’s long-term growth – namely, an aging population and diminishing marginal productivity of labor and investment. Over the past few decades, the Chinese economy has completed the bulk of its developmental catch-up, and current areas of development (like digital infrastructure) are less impactful than the factories, utilities, and roads of yesteryear. As growth of productivity slows, and China’s economy fully completes its development, it will be harder to continue organically meeting the state’s ambitious economic goals for 2035 and beyond – requiring levels of innovation that no amount of government investment has seemed to yield (and, she posited, that China’s systems of economic governance may not be effectively structured to yield) thus far. 

Garcia-Herrero concluded by provided her insights on audience questions, ranging from lending under the Belt and Road Initiative (very unlikely to expand) to China’s potential involvement in the CPTPP (fundamentally possible especially as a tool to pressure the US). 

Ultimately, Garcia-Herrero added nuance to the simplistic vision of “first in, first out.” While China’s early response to the pandemic, like that of many Asian countries, has prepared it for early economic recovery relative to the rest of the world, but that recovery is neither totally unthreatened by COVID nor a change to the fundamental challenges China’s economic growth faces for the next fifteen years.