Mainland China’s economic recovery is gaining momentum. Its GDP grew in 2020 despite the pandemic, and we have raised our 2021 growth forecast to 8.5 per cent – though our 2022 projection remains unchanged at 5.6 per cent as the recovery stabilises.
We have identified five key themes to watch in 2021 for China’s economy.
+ Private consumption has lagged in the recovery with retail sales growth still only about half of 2019’s levels. Income growth has returned to 80 per cent of pre-pandemic levels, but reduced consumer confidence in incomes and jobs means spending on discretionary items and services is still shrinking.
However, with COVID-19 contained and restrictions lifted, the hit to consumption from fear of the virus should fade. We believe consumption should thus return to pre-pandemic levels by mid-year with retail sales growing 12 per cent over 2021.
+ Exports stayed strong in 2020, soaring 21 per cent in 11 months, helped by high demand for pandemic-related products such as masks and medical equipment and laptops for remote working. Mainland China’s exports were also aided by the quick resumption to full production while other countries grappled with the virus.
As the world started recovering, consumers showed a preference for goods rather than services, boosting exports further, and we expect that trend to continue.
Export growth will be dampened by the renminbi’s appreciation but we expect this will be offset by stronger global demand in 2021, with export growth potentially reaching nearly 8 per cent and supporting investment in manufacturing.
+ Manufacturing investment will likely be a key driver for investment growth. Lower profits suppressed capital expenditure but global demand is now rising again and profits have returned to growth. Companies will want to invest more, particularly in automation and digitalisation, we believe.
Property and infrastructure investment rebounded quickly last year, boosted by government support and cheaper finance. However, their pace will likely slow in 2021. The need for stimulus has declined, and we expect special local-government bond issuance to be reduced to around 3 trillion renminbi in 2021 with proceeds diverted from traditional infrastructure to renovating shanty towns. Tighter financing measures for property developers will likely slow the pace of property investment.
+ Deflation is a bigger risk than inflation. Consumer price inflation started 2020 at 5.4 per cent but turned negative: pork prices fell after supply resumed following shortages caused by swine fever, but weaker consumer demand and cheaper oil have also contributed to softer consumer prices. For 2021, we expect core CPI to average just 1 per cent despite a gradual recovery in private consumption. Producer prices should return to inflation this year on the back of the continued domestic recovery, reaching 1.3 per cent, but that is still relatively subdued.
+ Policymakers will take a slow road to tapering easing. The fiscal deficit should reduce in 2021 as government revenues rebound and tax cuts expire. After falling 5 per cent in 2020, we expect revenues to increase by 10 per cent to 12 per cent as economic activity normalises.
Fiscal support for healthcare, social security and employment may be reduced but general government spending on infrastructure-related items, environmental protection and education will likely rise to pre-pandemic levels, with overall spending growth returning to around 8 per cent this year.
Government bond issuance will likely be lower with the special local-government bond quota reduced to 3 trillion renminbi and no issuance of special central-government bonds. We still expect some support for small firms to continue, probably through some continued tax cuts and fee reductions.
In all, we expect this will reduce the augmented fiscal deficit from 8.4 per cent in 2020 to around 5.7 per cent of GDP.
Further monetary easing is less likely because of the strength of the economic recovery, but premature tightening could derail the recovery in the private sector, which accounts for more than 85 per cent of urban employment.
The People’s Bank of China made smaller cuts to interest rates than other central banks, so there is little excessive easing to unwind. With deflation set to extend into early 2021, we expect the PBoC to stay on hold – but if the economic recovery is stronger than expected, policy rate hikes could start later this year.
First published 16 December 2020.
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The following analyst(s), economist(s), or strategist(s) who is(are) primarily responsible for this report, including any analyst(s) whose name(s) appear(s) as author of an individual section or sections of the report and any analyst(s) named as the covering analyst(s) of a subsidiary company in a sum-of-the-parts valuation certifies(y) that the opinion(s) on the subject security(ies) or issuer(s), any views or forecasts expressed in the section(s) of which such individual(s) is(are) named as author(s), and any other views or forecasts expressed herein, including any views expressed on the back page of the research report, accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Qu Hongbin
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