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China: reborn after Covid

Highest growth next year since 2012

China is reigniting its growth engines after a 2020 marked by the Covid pandemic. According to a survey of 35 economists from Nikkei and Nikkei Quick News, China’s economy will grow by 8.2% in 2021, the highest growth since 2012.

According to the survey, China’s economic growth rate is expected to accelerate from 4.9% in the third quarter to 5.9% in the fourth quarter and nearly 80% of economists expect the growth rate for 2021 to be above 8%. There are those like Ting Lu, chief China economist at Nomura, who predicted a 9% increase instead, partly due to the low base effect in 2020 and those like Iris Pang, chief Greater China economist at ING Bank, who said consumers will continue to spend in mainland China if restrictions on international travel remain in place for most of 2021.

Xu Xiaochun, economist at Moody’s Analytics, warned that while the domestic economy is recovering confidently, the main downside risks lie outside China.

“There is significant uncertainty regarding the growing number of new COVID-19 infections in the US and Europe, while China’s relationship with other governments has increasingly led to tensions. These could undermine China’s strong export growth, domestic production and investor confidence.”

US boost for China

Boosting Beijing’s economy is the administration of US President-elect Joe Biden, who is likely to take a more predictable and less confrontational approach to China than his predecessor Donald Trump, from whom, remember, the trade war started.

“We expect US-China relations to remain in question even under the Biden administration, as the critical attitude in the US towards China is bipartisan,” said Arjen van Dijkhuizen, senior economist at ABN Amro Bank. “‘That said, under Biden, US-China relations are likely to be handled in a less chaotic manner.

China's 2020 GDP +2.3%, full 'V' recovery

Despite the Covid-19 crisis, China managed to end 2020 with a gross domestic product up 2.3%, above market expectations of 2.1%, and exceed an annual value of 100 trillion yuan for the first time.

According to data released by the National Bureau of Statistics, GDP stood at 101,598.6 billion yuan last year, or about $15,420 billion. In percentage terms, however, this is the slowest growth in more than 40 years.

China’s fourth-quarter growth boom

The leap recorded in the fourth quarter was significant, when GDP increased by 6.5% per year, more than the 6.1% expected by analysts and the 4.9% recorded in the previous three months, while growth on a quarterly basis was 2.6% (2.7% in the third quarter and 3.2% estimates).

“The fourth quarter numbers are remarkable,” Haibin Zhu, JPMorgan’s chief China economist, told CNBC after the release of the latest Chinese economic data. “If you look at the 6.5% in the fourth quarter, it’s even higher than the pre-pandemic growth path. From that point of view, the V-shape recovery in China is complete,” he added.

Consumption, a weak link in the recovery

In a context where the recovery from the crisis in the first quarter seems to be complete, the weak link in the chain remains consumption. The Chinese still seem very cautious in their purchasing decisions. This is borne out by the figures both for the fourth quarter, when consumption contracted by 4.6%, and for the entire year, when the drop stopped at -3.9%.

On the consumption side, “signs point to a rebound due to a rebound in incomes,” said Julian Evans-Pritchard, senior China economist at consultancy Capital Economics, adding that income growth is the result of a Chinese labour market that is returning to normal. “Despite the latest decline in retail sales, we see a significant increase in consumption as households are reducing excess savings accumulated last year,” she wrote in a note after the data release.

However, JPMorgan’s Zhu warned that a new Covid outbreak in Hebei province – which borders the capital Beijing – could dent the recovery in consumption and the service industry.

GDP 2021 to rise by up to +8.4%

China was the first country to report cases of Covid-19 in late 2019. Authorities shut down more than half the country to contain the virus, leading the economy to contract by 6.8% in the first quarter of 2020, the weakest on record.

“China’s economy returned to growth as early as the second quarter of last year, fuelled by strong manufacturing and export activity,” Zhu said. “This helped China become the only major economy to grow in 2020 – expanding by 2.3 per cent, according to official data – despite the challenges of the Covid pandemic,” he added.

For 2021, meanwhile, ING analysts expect China’s GDP growth rate to be 7%. This is lower than the ‘8.4% in 2021 indicated by a Reuters poll.

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