Discipline proved to be a very important attribute for China in terms of the velocity in which it managed to combat the pandemic and more importantly close off 2020 by registering an economic growth, as opposed to other economies which closed 2020 negatively.
Last week China officially announced its economic numbers for 2020, in which it managed to register a 2.3 per cent growth as opposed to the two per cent estimate being expected by a pool of economists. Thus no major surprises there for the market to react strongly on the day. However, when delving into the numbers we should look at China in 2021 more constructively and more plausibly as an investment idea.
Looking specifically at the sectors, there is a clear trend of recovery across the board, even in those sectors which were directly hit by the pandemic, such as the ‘accommodations and restaurants’ segment. Similarly, we continue to see a clear trend in important GDP contributors such as the ‘real estate’ market which closed the last quarter of 2020 with a 6.7 per cent growth and closed the year with a shy three per cent growth level. The latter continues to reflect the efforts taken by the Government in sustaining the sector, in addition to the move of the lower class into the middle class which continued their move into tier 2 and 3 cities. Ultimately this was imperative towards the increase in the average price per square meter, which again closed 2020 positively.
More encouraging were the ‘wholesale/retail and transport’ sectors which rebounded strongly in Q4 2020 to close-off the year positive and flat respectively. The latter numbers prove that consumer confidence has continued to pick-up which augurs well for 2021.
Moreover, last week China also published its retail sales figures, considered key leading indicators which give more visibility of consumer trends and ultimately the impact on economic growth. Despite there was a slight dip in December of 0.4 per cent, throughout 2020 there was a clear trend of recovery from February to December. The total retail sales of social consumer goods reached 4,056.6 billion yuan, up 4.6 per cent year on year in the month of December.
What is worthy to note is the increase in consumer discretionary spending which might be a clear signal that consumers are less concerned of another possible economic fallout. Indeed, a strong indicator in this regard is the remarkable recovery in the automobile industry which kept its pace strongly also in the last quarter of the year. Interestingly enough was the positive ripple effect on other economies, such as Germany in which it was indirectly positively impacted by the strong demand experienced by major German automakers in the second half of 2020.
Going forward China has a clear plan to fulfil its self-economic targets which should be strongly supported by domestic demand. A clear strategic reform is now in place with four major 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.
Moreover, China has also taken important steps to reach its goals through its membership in the ‘regional comprehensive economic partnership’ (RCEP), which includes 15 Asia-Pacific economies. RCEP will account for over 30 per cent of the global economy, 30 per cent of global population and 2.2bn consumers. Clearly a strong regional force which should also aid China’s targets in the coming years.
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 in 2021. We expect policy to normalise in tandem with a rebound in consumption. We believe that investors should look into China as an investment proposition not only in the short-to-medium term, but also as a long term investment. It is evident that the Chinese economy has all the attributes to become a stronger economic force in the next years with a sustained mid-single digit economic growth figure.
Disclaimer: This article was written by Jordan Portelli, head of fixed income 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.
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