The COVID-19 pandemic has dominated the macro economy across the globe in 2020; however, China’s experience has diverged significantly from the rest of the world. Adding fuel to conspiracy theories is the fact that on growth, China is forecasted to be the only major economy to register positive year-over-year real GDP growth this year.
Interest rates are most of the way back to pre-COVID levels while much of the developed world has zero or negative rates. Even in consumer service sectors that were hit the hardest by the virus outbreak and remain depressed in other countries, activity has gained significant ground in the post-COVID recovery. This remarkably includes restaurants and domestic air travel, which are back to last year’s levels (though still below trend levels).
The outlook for China is a positive one. From a policy perspective, an acceleration of various structural reforms to achieve higher quality growth will be the key themes of China macro next year. We expect policy to normalise in tandem with a rebound in consumption. After the nationwide shutdown in February, policymakers acted swiftly to support the economy.
Now that domestic demand is mostly back to normal, exporters have shown remarkable resilience, and the risk of another wave of virus seems low, we think policy normalization is in order for China next year. This includes a notable deceleration in credit growth, a smaller fiscal deficit, marginally tighter housing policies, and stable monetary policy.
The Bloomberg consensus estimate for Chinese real GDP growth for 2021 is of around 8.0 per cent. Underlying the headline GDP, the composition of growth is likely to shift significantly from 2020 to 2021. Household consumption was hurt the most this year due to physical constraints after the virus outbreak, the loss of jobs and incomes, and the emphasis on public investment rather than income transfer in China’s policy responses. As the virus is brought under control, the labour market continues to recover, and the still elevated saving rate gradually normalises, a sharp rebound in household consumption is expected next year.
Conversely, investment has been the key driver of the economic recovery this year thanks to the sizable government stimulus introduced earlier. Nevertheless, policy normalization implies tapering of government-driven investment going forward, which could result in a lower than expected result for GDP result, albeit within range. While domestic demand is poised to rebound in 2021, with consumption replacing investment to be the key driver, other considerations such as vaccine availability and the relationship between the US and China under a Biden presidency play a secondary role.
On a vaccine, although the approval and the adoption of a safe and effective vaccine can boost confidence and allow for further recovery in the consumer service industry, the net effect on Chinese growth is likely to be small compared with other economies such as the US and Europe. This is because the virus has already been well controlled in China, and because vaccine distribution enables international tourism that can be a drag to Chinese GDP.
On global growth, US economists expect another fiscal stimulus package after the election. However, the direct impact on Chinese real GDP through the trade channel is likely to be small. On US-China tensions, tariffs are unlikely to increase further and rhetoric is expected to be calmer under a Biden administration, but tensions in the technology sector, capital markets, and geopolitical sphere may persist.
With the backdrop of an increasingly challenging external environment, there may be pressure on Chinese policymakers to accelerate a set of reforms to achieve more sustainable, more resilient, and higher-quality growth in the long run.
These reforms are expected to be focused on four areas. First is technology, which should reduce China’s reliance on other countries and improve productivity at the same time. Second is the liberalisation of factor markets to allow for more efficient allocation of labour, land and capital. Third is environment, where China has already introduced targets for electric vehicles to reach 20 per cent of new auto sales by 2025 and made the commitment to become “carbon neutral” by 2060. Fourth is consumption, which calls for increased government spending in healthcare, pensions and unemployment insurance to reduce household savings. This is the roadmap for China to become a “moderately developed” country by 2035.
Disclaimer: This article was written by Simon Psaila, investment manager at Calamatta Cuschieri. The article is issued by Calamatta Cuschieri Investment Services Ltd, which is licensed to conduct investment services business under the Investments Services Act by the MFSA and is registered as a Tied Insurance Intermediary under the Insurance Distribution Act 2018. For more information visit https://cc.com.mt.
The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.