China’s first quarter record performance will accelerate momentum in China and support recovery in the US and global economic prospects – as long as unwarranted geopolitical tensions remain in check.
A year ago, China’s first quarter plunge was -6.8 percent, due to the pandemic effect. In the West, it was widely seen as the “end of China’s growth story.”
Instead, in early February 2020 I predicted a turnaround in the increase of new virus cases in China, with the beginning of the economic rebound in the second quarter. Following the 6.5 percent expansion in the fourth quarter of 2020, the GDP rose to a record 18.3 percent year-on-year in the past quarter.
Obviously, the performance benefited from the base effect, due to the pandemic plunge a year ago. Nonetheless, it reflects a strong impetus for normalization.
Expansive momentum from manufacturing to services
The strategic rebound effort began with supply-side expansion. Now it is broadening, thanks to improving domestic demand and higher exports.
All major indicators are already above the pre-crisis level. The Purchasing Managers’ Index (PMI) has grown 13 months in a row. Production of machineries and health care-related products continue to show strong growth.
As the supply-side performance is driving turnaround in consumption, even the services PMI has been expanding almost a year.
With the easing of social distancing, retail sales, which have been expanding for 8 months, are likely to strengthen. Due to new variants and lingering pandemic waves in many parts of the world, international travel restrictions are likely to foster domestic spending in the Chinese mainland.
After the severe pandemic-induced economic plunge, the international auto sector is recovering with US retail sales at 26 percent in the first quarter. However, China’s auto production has increased for 12 months at over 40 percent year-on-year.
Exaggerated concerns over monetary tightening
Last year, Chinese performance relied on fiscal and monetary support, while a surge of debt sparked unease among some observers. With recovery, government authorities have urged banks to shun disproportionate lending growth.
Nonetheless, concerns over monetary tightening seem overblown.
In line with its normalization objectives, China’s central bank seeks to cool credit growth to preempt debt and financial risks. But it is moving cautiously not to disrupt the recovery.
Moreover, inflation has strengthened and been in positive territory since March.
Furthermore, China’s gradual financial integration with the global markets is supporting its domestic momentum.
Chinese government bonds attract diversifying foreign investors
In particular, Chinese government bonds (CGBs) are growing in popularity across global fixed income portfolios. In just two years, foreign holdings of CGBs have nearly doubled to almost $310 billion.
Despite US government’s efforts at China’s geopolitical containment, US investors seek steadiness and diversification through CGBs’ high and stable yield. Chinese 10-year bonds have yields over 3.2%, while the U.S. 10-year Treasury yield is at 1.7%.
And this is just a prelude. Over the next 20 months, more than 360 onshore Chinese bonds will be added to major investment indexes tracked by global investors. The full inclusion is projected to attract around $150 billion of foreign inflows into China’s $13 trillion bond market; the third-largest in the world after the U.S. and Japan.
The huge inflows will support the yuan, even as China’s current account surplus is shrinking.
From exports and investment to innovation and consumption
With increasing investment by both private and state-owned enterprises, public investment will rise faster, thanks to the push under the 14th Five Year Plan.
Gradually, that investment will shift from manufacturing and real estate, which fueled China’s old growth model, toward research and development (R&D), as the new growth model takes hold. The latter, in turn, is accelerating, thanks to the rapid expansion of China’s Silicon Valley; the Greater Bay Area across Guangdong, Hong Kong, and Macao.
As China has begun the transition to higher value-added, parts of the cost-focused supply-chains in the Chinese mainland are relocating to Southeast Asia.
That is likely to boost regional integration under the Regional Comprehensive Economic Partnership (RCEP), which is a market-led regional win-win for economic development – despite ongoing geopolitical attempts to split Asia.
Global recovery or worldwide divisions
The key international uncertainty involves the question whether the US will put global interdependency – cooperation in climate change and international trade and investment – ahead the divide-and-rule geopolitics against multiple major economies.
The implications will not reverberate only outside America.
Economic instability and geopolitical tensions have potential to derail the Biden administration’s own domestic programs, which rely on huge debt-taking, multi-trillion-dollar stimulus packages, continual monetary easing; and what Democratic economist Paul Krugman has termed “super-core inflation amid a year of bottlenecks and blips.”
With progressive normalization and relative international stability, China’s expansion momentum will steady toward the end of the year, while the strong rebound will allow it to exceed the 2021 growth target of “above 6 percent.”
Even with moderation, growth is likely to exceed 6.5 percent and has potential up to 8.5 to 9.5 percent in 2021, with likely deceleration 6 percent or so in 2022.
Assuming peaceful evolution in Asia Pacific, China’s GDP is on track to surpass the US as the world’s largest economy in the late 2020s. That’s not away from the US. Thanks to global interdependency, such expansion can support both US and global economic prospects.
The original version was published by China Daily on April 20, 2021