Trade strengthens

CHINA - Forecast 07 May 2021 by FAN Gang and Chunyang Wang

Growth is strong, weak investment notwithstanding. In Q1 2021, industrial output was up 14% y/y from Q1 2019, with annualized growth of 6.8%, slightly lower than in Q4 2020. In Q1, investment rose 25.6% y/y, and increased only 5.4% from Q1 2019, with an annualized growth rate of 2.6%, much lower than in H2 2020.

GDP was up 18.3% y/y in Q1, and up 10.3% from Q1 2019, with an annualized growth rate of around 5%. In this report, we mostly use Q1 2019 as the benchmark period, because the major shock from the pandemic in February 2020 makes Q1 2020 data hardly comparable. The adjusted growth rate can be viewed as stable.

The GDP deflator was 2.05%, down 1.76 pps from last Q1 2020. This is mostly contributed by lowering CPI. In Q1 2021, producer prices continued to increase. In March, the ex-factory price index and PPI saw growth reach 4.4% and 5.2% y/y, up 4.8 pps and 5.2 pps from December 2020. This is mainly driven by strong demand for commodities from other countries’ economic recoveries. Money and financial indicators grew more slowly. At the end of March, M2 was up 9.4% y/y, down 1.5 pps from its peak last year. M1 was up 7.1% y/y, and has decreased 2.9 pps over four consecutive months.

Imports rallied in Q1, and grew 19.2% y/y, up 19.3 pps from Q4 2020. Exports increased 16.5% from Q1 2019. The adjusted growth rate is comparable to that of H2 2020, and is at high levels for recent years. China even dethroned the United States as Europe’s top trading partner for goods in 2020. Even though pandemic-related goods comprise a sizable share, other categories’ exports are also rising, reflecting the productivity-driven feature. We expect export growth in H1 to be 16%.

Retail sales of social consumption goods in Q1 were up 8.5% from Q1 2019, indicating that consumption is still on its way to recovery. Premier Li Keqiang said on March 23rd that China’s economic growth this year could exceed a target of “above 6%,” with the government seeking stable expansion and job creation, emphasizing consumption. Consumption inequality, which is closely related to income and wealth equality, rose last year. With the premier’s effort, and return to normal monetary policy, we believe consumption as well as the much-related imports will rise this year.

Postponing the retirement age will be on the Chinese government’s agenda, according to announcement made March 22nd, with further details released on April 13th. China’s aging problem is severe, and population growth is rapidly declining. We expect the retirement age delay to be gradual, and experimental. It will alleviate the negative effects of slower population growth. Population aging and slower growth mainly negatively affect GDP, but not necessarily in per-capita terms, due to China’s high savings rate, and financially rich central government.

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