Solid, if moderating, growth picture for China
China’s GDP plunged by 6.8% year-over-year (y-o-y) in Q1 2020, the largest quarterly contraction since 1970s. Given such a low base for comparison, while this year’s Q1 growth figure was very high (18.3% year on year) it was already largely expected. Actually, the reported growth fell slightly short of the the market consensus forecast of 18.5%, leading us to make a minor (mechanical) adjustment to our Chinese GDP forecast for 2021, which passes to 9.2% from 9.3% previously.
In our view, the most rapid stage of China’s recovery is likely behind us, with the GDP growth rate converging back to its long-term trend, which should be about 5-6% in 2021. Quarter-on-quarter Chinese growth will likely come back to levels that are consistent with such an annual rate going forward, i.e. about 1.2-1.5%.
While the economy as a whole has returned to trend growth, large sectoral differences still exist. In other words, the ‘K-shaped’ recovery persisted in Q1. The industrial sector remained in the lead, rising 24.4% year-over-year (y-o-y), lead by strong external demand for Chinese manufacturing goods. Trade data show that Chinese exports remain strong, although the growth rate has moderated from its peak. In March, Chinese exports grew by 30.3% y-o-y, down from 60.6% in the first two months of the year. Looking forward, we expect Chinese export growth to remain resilient over the next quarter or two.
Services expanded at a much slower 15.6% y-o-y rate than the industrial sector, suggesting there is further room for it to pick up. In 2019, services accounted for 54% of Chinese GDP, up from 44% 10 years before. In the absence of herd immunity, many service industries such as travel and tourism are still quite sluggish due to restrictions imposed by the government and people’s own caution.
The improvement in retail sales is encouraging, rising by 34.2% y-o-y in March, compared to 33.8% in the first two months of the year. There has been a surge in online sales of services (+60.4% y-o-y) and the purchasing managers surveys for services has also been rising.
Looking forward, we believe there is a high chance that manufacturing investment will continue to improve strongly on Chinese industrial firms’ rising capital investment. Since 2016, growth in corporate capex in China has been relatively sluggish due to the government’s efforts to cut excess capacity in certain industries such as steel and a tightening of financial conditions to encourage deleveraging. A strong cyclical recovery of the global economy means there is room for Chinese manufacturers to expand their capacity, especially in industries benefiting from structural tailwinds (such as green technologies).
By contrast, growth in property investment may gradually moderate as the Chinese government moves to curb property speculation and restrict developers’ leverage ratios. Finally, the Chinese government seems to be stepping up efforts to vaccinate the population against covid. The government may reach its target to have 40% of the population vaccinated by the end of June.
In conclusion, China’s Q1 GDP report confirmed our expectation for another quarter of solid recovery, although growth momentum likely has peaked. Strong exports, together with continued recovery in consumption and services and corporate capex, will likely boost Chinese growth in the rest of 2021.