China’s recovery is reaching a peak now in 2021.
Key Interest Rates, China
Source: Bank of Singapore, Bloomberg
This year’s economic releases for January- February - the period encompassing the Lunar New Year - showed soaring gains compared to a year ago when the pandemic was at its height. The data point to clear strength in industrial production, exports and retail sales with only fixed asset investment still less than expected.
Industrial production expanded by 35.1%YoY in January-February, exports were up 60.6%YoY and retail sales increased by 33.8%YoY. In contrast, the same figures for December were 7.3%YoY, 18.1%YoY and 4.6%YoY respectively. This year’s data for January-February thus shows how weak activity had been a year ago.
Monetary & Credit Growth, China
Source: Bank of Singapore, Bloomberg
For Q1’21, China’s GDP may bounce by 15%YoY as a result of such base effects. We expect the economy will expand by 8.1% for 2021 as a whole owing to last year’s lower growth of 2.3%.
But despite the robust rebound, China’s policymakers are only gradually reducing economic stimulus given uncertainty over the course of the pandemic in the rest of the world.
This month the National People’s Congress cut the government’s budget deficit target from 3.6% of GDP in 2020 to 3.2% in 2021, rather than lowering it to the 3.0% deficits that prevailed from 2015-2019 before the pandemic began.
The People’s Bank of China also continues to support the recovery by refraining from raising benchmark interest rates. With February’s inflation rate still very low at -0.2%YoY, the central bank is able to let the economy keep rebounding without having to increase its 7-day reverse repo rate from 2.20% or its 1Y Mediumterm Lending Facility from 2.95% (see first chart).
We expect the authorities will continue to only gradually reduce fiscal and monetary stimulus this year. The second chart above shows total social financing - a measure of broad credit growth - peaked last year in October at 13.7%YoY and is now running at 13.3%YoY.
Thus, we see strong economic growth and still substantial monetary and fiscal stimulus continuing to support risk assets this year in China.Disclaimer applicable to recommendation
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