China’s Q3’20 GDP data released today showed the economy expanded by 4.9%YoY, up from 3.2%YoY in Q2’20 and a major reversal from Q1’20 when the economy slumped by -6.8%YoY during the height of the pandemic in China.
China’s economic rebound is also broadening. September’s activity data was published today, showing industrial production rose by 6.9%YoY up from 5.6%YoY in August, retail sales increased by 3.3%YoY compared to 0.5%YoY previously and fixed asset investment expanded by 0.8%YoY versus -0.3%YoY in August.
Chart 1 shows China’s key activity indicators in YoY terms are all back in positive territory. Further, the recovery is become more broad-based.
After the pandemic struck in Q1’20, industrial production led China’s rebound in Q2’20.
Local governments and state-owned enterprises (SOEs) increased support for the supply side of the economy. But over Q3’20, the demand side has started to catch up, making the recovery more durable.
September’s 3.3%YoY increase in retail sales is still well below the 8.0%YoY growth rate recorded at the end of 2019. But it is far above the -15.8%YoY slump reached at the worst of the crisis in March.
Similarly, September’s fixed asset investment at 0.8%YoY remains below its 5.4%YoY growth rate recorded at the end of last year as manufacturing investment lagged by -6.5%YoY. But infrastructure investment at -0.3%YoY is almost back in positive territory in YoY terms while property investment is expanding by 5.6%YoY. September’s trade data published earlier this month also showed the demand side of the economy recovering with exports rising 9.9%YoY.
Following today’s GDP data, we upgrade our forecasts and now see the economy growing by 2.5% in 2020 and 8.1% in 2021 compared to our previous estimates of 1.7% and 7.1% respectively. We thus project China’s economy may expand by more than 10% in total over this year and next. In contrast, the US economy is already lagging China’s recovery as Chart 2 shows and may only return to its pre-crisis size by the end of 2021.
China’s economy is therefore set to strongly outperform its peers over 2020 and 2021 to the benefit of the CNY. We keep our long-term forecast of 6.55 for China’s currency against the USD.
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