Why China’s recovery is not what it seems

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This is a guest post by Michael Pettis, a finance professor at Peking University and a senior fellow at the Carnegie-Tsinghua Center. His new book ‘Trade Wars are Class Wars’ was co-authored with former FT Alphavillain Matt Klein and is available at all good book stores.

On Tuesday, China’s National Bureau of Statistics released August data on the Chinese economy. It showed that while retail sales — a proxy for domestic consumption (although it includes other things) — was down 8.6 per cent for the first eight months of 2020, it nonetheless posted its first monthly year-on-year increase in 2020, with retail sales 0.5 per cent higher than last year.

The data also showed that industrial production was 5.6 per cent higher. Add to that a 4.16 per cent rise in fixed asset investment and a 19.3 per cent increase in August’s trade surplus, and the data left most analysts convinced that China’s recovery from the ravages of the Covid-19 pandemic was both solid and sustainable.

But this is not what the data suggest. In fact they indicate just how lop-sided and vulnerable China’s recovery has been so far. As the graph below shows, before 2020 retail sales had grown slightly faster than industrial production, indicating a slow…

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