China’s economic recovery is leading the rest of emerging markets (EM), as China’s real Gross Domestic Product (GDP) is expected to recover back to last year’s levels by the end of this year.
In a way, this should not be surprising, given that China has been “first in, first out” (FIFO) of the COVID-19 crisis. Because China’s government acted quickly and aggressively to contain the virus, workers were able to return to work and production was restored earlier than expected. Industrial production recovered close to full capacity by June.
Export numbers have also been surprising on the upside. China has been gaining export market share with the rest of the world still in partial lockdown. Additionally, China has also benefited from a surge in external demand for consumer electronic products with more people working from home and COVID-19-related medical supplies including masks and ventilators.
This has helped to reduce the policy burden of the Chinese government. That being said, the Chinese authorities have also been providing monetary and fiscal support to the real economy. The former in terms of more selected targeted easing to the small and medium-sized enterprises (SMEs) and the latter in terms of increased infrastructure spending.
Despite China currently undergoing a second wave of infections, they have been largely localized. Comparatively speaking, many of the other EM countries, like Brazil, Mexico, India and Indonesia, are still struggling with the first wave (as shown in Exhibit 1). In many ways, this has restricted the re-opening of their economies, which in turn has significantly hurt economic growth, and therefore is necessitating larger fiscal and monetary policy responses.
Exhibit 1: China is FIFO out of EM
China’s FIFO experience with the COVID-19 pandemic points toward a faster economic growth recovery and a wider growth differential compared to the rest of emerging markets. This should continue to help support the China A-share market performance as well as its outperformance compared to other EM equity markets. China A-shares have outperformed the MSCI EM by 17.4 percentage points in U.S. dollar terms year-to-date as of 14 August 2020.