GDP set to grow more than 7% in 2021
We forecast Chinese GDP to rise 7% in 2021, less than our peers’ forecasts of around 8%. Our forecast is based on the global economic uncertainty brought on by the pandemic, and the significant chance that China will take countercyclical measures to address structural reforms. GDP climbed 2.3% y/y in 2020, with the slower growth mainly occurring in Q1 and Q2.
Investment rose 2.9% y/y, down 2.5 pps from 2019. But investment growth rates have been rising all year. Consumption growth is still below normal. Retail sales of social consumption goods fell -3.9% y/y, and the area’s real growth decreased -5.3% y/y in 2020.
CPI rose 2.5% y/y in 2020, down 0.4 pps from 2019. We expect CPI growth will first decrease and then rise in 2021. In 2020, the ex-factory price index of industrial goods fell -1.8% y/y, and PPI fell -2.3% y/y, down 1.5 and 1.6 pps from 2019 respectively.
Chinese policymakers adopted loosening monetary policy in 2020, to counteract the impact from the pandemic. Currently, monetary policy has also returned to a robust stance. At the end of 2020, M2 was up 10.1% y/y, still down 1 pps from the peak growth rate in 2020. The deficit grew further. National fiscal revenue fell -3.9% y/y, while fiscal expenditure rose 2.8% y/y.
Exports rose 4% y/y, down only 0.6 pps from 2019. But imports were instead weak, and fell -0.7% y/y. In particular, China’s exports in November experienced their strongest surge since early 2018. China’s global export share increased to over 13% in the second and third quarters, from 11% last year, the highest for any quarter. All of this happened despite a strong RMB. This outcome can be mostly attributed to China’s good pandemic control, which allowed production to proceed uninterrupted, in comparison to other major economies.
On November 15th, 2020, 15 countries— ASEAN members, plus Australia, China, Japan, South Korea and New Zealand — signed the Regional Comprehensive Economic Partnership (RCEP), arguably the largest free trade agreement in history. This is the first time China has signed up to a regional multilateral trade pact. It’s an example of China’s commitment to the greater openness repeatedly advocated by President Xi Jinping. While the trade deal certainly will boost these countries’ economies in the short term, in the long term it is "a victory of multilateralism and free trade," as Prime Minister Keqiang Li put it.
After the Chinese RMB recently rallied to a 30-month high against the dollar, at a rate of 6.47, Beijing will make it easier to use the yuan in international transactions. Policies include streamlining cross-border currency transaction procedures, announced on January 4th; and lifting a firm’s overseas fund for its total equity from 30% to 50%, on January 5th. At the same time, the dollar index declined. Given the good pandemic control in China and loosening monetary policy abroad, we expect the RMB to experience enormous appreciation pressure -- but appreciation will likely be gradual, or the currency nonetheless be kept stable, due to Beijing’s effort.
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