Mainland China's export strength in 2020 was largely supported by its quicker return to work than other countries and by high demand for pandemic-related products including masks and medical instruments, plus electronics such as lap-tops used in remote working. But with vaccines now being rolled-out worldwide, exports will be more reliant on a recovery in global demand.

In May 2020, the country's pandemic-related exports were 76 per cent higher than a year earlier and comprised 12 per cent of total exports. They contributed 1.8 percentage points to mainland China's export growth between January and November.

However, as other countries began to manage COVID-19 better and started easing lockdowns, demand growth for pandemic-related products slowed. But the gradual global recovery and easing of restrictions helped to lift general consumer demand and orders for other exports picked up.

For 2021, demand for pandemic-related products will slow further as more countries roll-out vaccination programmes and can better contain COVID-19. That could result in a 1.4 percentage point drag on export growth.

Vaccinations are being distributed first in developed regions including the US and European Union and as these markets make up roughly a third of China's exports, it could significantly boost general consumer demand. In a more normalised world, as COVID-19 is contained, we estimate other exports would rise by 8.3 per cent year-on-year, contributing 7.8 points to exports growth.

In 2020, other exports rose by only 0.6 percentage points. Thus, we expect there could be a 7.2 point boost to exports growth from a revival in global demand this year - more than offsetting the decline from reduced demand for pandemic-related exports.

There are other factors to consider, including US-China trade tensions. Although we do not expect a significant change in stance from either side, volatility in the relationship will now likely reduce.

Currency appreciation could also have an impact on exports, but this is likely to be outweighed by a revival in global demand. The renminbi strengthened by around 3.4 per cent against a basket of currencies between January 2020 and November in real terms. We estimate the sensitivity of exports growth to a stronger currency is 0.23, which would translate into roughly a 0.8 percentage point drag on exports growth.

Future appreciation against a basket of currencies could be limited, but a stronger currency also makes imported components cheaper. About a quarter of mainland China's total export value is from processing imported materials. With the global demand recovery likely to continue, the net impact of a stronger exchange rate on total exports demand should be manageable, in our opinion, and likely to be outweighed by the global recovery.

So in all, we forecast exports growth to pick up in 2021 due to a low base and a continued recovery in global demand. We see exports growing by 7.9 per cent during the year.

This should bode well for a continued domestic recovery, particularly for manufacturing investment, which is expected to be a key engine for investment growth in 2021. We forecast 7.5 per cent investment growth and 8.5 per cent GDP growth for mainland China in 2021.

First published 6 January 2021.

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