China’s economy ended 2020 strongly, expanding by 6.5%YoY in Q4’20, its fastest pace in two years.
Source: Bank of Singapore, Bloomberg
As the chart shows, China’s growth has thus returned to its pre-crisis trend rate of around 6.0% per year. In contrast, the US economy - which will report Q4’20 GDP on January 28 - remains well below its long-term growth rate near 2.0% a year.
China’s growth still suffered significantly from the pandemic last year. In Q1’20, GDP contracted by a very sharp -9.7%QoQ at the onset of the crisis. This led to the economy only expanding by 2.3% for 2020 as a whole - its slowest annual growth in more than four decades - despite China’s V-shaped rebound in the last three quarters of 2020.
Source: Bank of Singapore, Bloomberg
China’s recovery also continues to be uneven. December’s activity data - released with Q4’20 GDP - showed industrial production rose by a firm 7.3%YoY.
This mirrored China’s record monthly trade surplus of USD78.2 billion in December, driven by exports growing 18.1%YoY due to strong demand globally. But the successful rebound of the supply side of China’s economy still isn’t being matched by the demand side.
Retail sales rose by 4.6%YoY and fixed asset investment by 2.9%YoY in December. As the chart above shows both indicators thus continue to lag industrial production and export growth. Consumers remain cautious despite the pandemic largely being contained within China.
China’s economy, however, will still be one of the few to grow in 2020 and this year we forecast a further strong rebound in GDP of 8.1%.
First, vaccines should give consumers more confidence again. Second, demand for China’s exports is likely to stay firm as the global economy recovers from the pandemic. Third, Beijing will reduce its fiscal support as China’s economy recovers further but will not sharply tighten its spending this year. Last, the People’s Bank of China will also slow the pace of credit growth from above 13%YoY currently to 10-11%YoY but will not aggressively raise interest rates in 2021.
We thus remain constructive on the outlook for China’s economy in 2021 and expect the CNY to rise further against the USD to 6.15 this year.Disclaimer applicable to recommendation
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