Our outlook for the Chinese economy in the Year of the Ox
The synchronised recovery of the global economy we expect this wear will provide a favourable external backdrop for China given the country’s role as a manufacturing hub and the world’s largest exporter.
Compared to the strong rebound in exports and manufacturing, the recovery of domestic consumption in China, especially of services, has been relatively slow. But we expect household consumption to catch up as covid-19 concerns fade and government stimulus targets households. Indeed, China is set to overtake the US as the world’s largest retail market in 2021.
The picture for fixed-asset investment may be mixed. Manufacturing investment will likely outperform after lagging throughout 2020 while property and infrastructure investment may moderate somewhat. The People’s Bank of China has largely normalised monetary policy and will likely adopt a neutral stance throughout 2021. At the same time, the rolling-back of the fiscal stimulus could cause some drag on growth.
With these considerations in mind, our central forecast is for the Chinese economy to expand by 9.3% in 2021, after 2.3% in 2020. We estimate that “underlying” growth will be about 5.0% this year, with the remainder of the 9.3% figure due to a favourable base effect. We believe the 5.0% forecast for underlying growth is reasonable. It is slightly below our previous projection of Chinese growth for 2021 made before the disruption caused by the pandemic.
While the overall outlook is positive, there are some risks to watch. US-China tensions will likely persist under president Biden. In addition, rising credit defaults in China may cause market turbulence in the short term.
On the domestic front, it appears that the Chinese government sees a window of opportunity to push forward structural reforms in the financial sector. Recent credit defaults by some local state-owned enterprises show that policymakers are intent on ending implicit government guarantees on corporate credit in China and are aiming to ensure more accurate market pricing of corporate credit risks. While this move will be beneficial to the Chinese economy in the long run, it could continue to cause market disturbance in the short term.