Mainland China's post-pandemic economic recovery is beating expectations, though highly uneven. While private consumption is likely to continue to lag, infrastructure and property investment seem set to be the most important drivers of GDP growth in the remainder of 2020. We have thus raised our forecast of 2020 GDP growth from 1.7 per cent to 2.4 per cent and still expect 7.5 per cent growth next year.
The economy contracted by a record 6.8 per cent in the January-March quarter compared with the same period in 2019. But after rebounding 11.5 per cent quarter-on-quarter in the subsequent three months, the recovery is underway. We now expect a further 5.4 per cent growth in July-September followed by 6.2 per cent in the final quarter of 2020 compared with the same periods last year, returning mainland China’s economy to pre-coronavirus levels.
Infrastructure investment has rebounded sharply, funded by 4.75 trillion renminbi (USD690 billion) of special local-government and central-government bonds. Although heavy summer rains in southern and central mainland China hindered some construction, they make more repairs necessary. Infrastructure investment in the second half of 2020 could grow by 15 per cent compared with a year earlier.
And property investment has experienced a similar V-shaped recovery, fuelled by credit availability and a quick recovery in real-estate transactions.
Goods exports have been an unexpected bright spot, boosted by demand for electronics and pandemic-related products. That more than offset reduced foreign orders for general consumer goods and exports should keep growing. Meanwhile, the construction recovery will increase demand for commodities, meaning imports will rise too. Implementation of the Phase One trade deal with the US should also bolster imports.
However, domestic private demand has yet to pick up. COVID-19 cut consumers’ incomes but also changed with their behaviour; households facing job-market uncertainty are saving more and likely to stay cautious as virus risks remain. We thus expect year-on-year rises in retail sales of only 1.3 per cent in the third-quarter and 6.3 per cent in October-December.
A recovery by private-sector businesses is key for stabilising jobs and revitalising consumption. However, private investment has lagged the public sector, held back by high stocks, low profits and concern over tensions with the US. Manufacturing investment is particularly weak and will likely see only a gradual recovery in the rest of the year.
With an uneven recovery and uncertain global growth, Beijing is focusing on reflating the domestic economy. We thus expect policy to remain supportive with further interest-rate reductions this year – a 25 basis-point cut in the average reserve-requirement ratio to 9.15 per cent and the one-year loan prime rate trimmed by another 20 points to 3.65 per cent.
Not only will private-sector companies likely need increased credit to survive prolonged weak sales, the central bank needs to keep liquidity loose to support large issuance of government bonds.
Meanwhile, fiscal spending is likely to turn more expansionary. The government deficit, 3.3 per cent of GDP in the first half of this year, is likely to increase to 7.7 per cent in the second half, providing strong support for further economic recovery.
Besides infrastructure investment, another policy focus will be continuing with 2.5 trillion renminbi (USD360 billion) of tax cuts and fee reductions, targeting smaller firms and sectors such as catering, accommodation and entertainment, which have been hardest hit by the virus.
First published 24 August 2020.
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