China’s Economy Looks Ahead To Stronger 2021 – Analysis

By Michael Lelyveld

After a tumultuous year of partial recovery and record lows, China’s economy can look forward to a booming rebound in 2021.

Most analysts expect the country to bounce back from the deadly damage of the COVID-19 crisis with high economic growth rates last seen nearly a decade ago.

Despite the lockdown in early 2020 that dragged the economy into a 6.8-percent contraction in the first quarter, China managed to stage a tentative turnaround with positive growth of 3.2 percent in the second quarter and more solid 4.9-percent expansion in the third, according to the National Bureau of Statistics (NBS).

In October, the International Monetary Fund projected that gross domestic product growth for the full year would reach 1.9 percent, the lowest for China on record but the highest among the world’s major economies.

In the coming year, the IMF expects China’s recovery to soar with an 8.2-percent growth rate, while world output battles back from a loss of 4.4 percent in 2020 to growth of 5.2 percent.

This week, the World Bank confirmed its earlier estimate of 7.9-percent growth next year.

But the forecasts have been heavily qualified with caution in the face of “tremendous uncertainty.”

“The ascent out of this calamity is likely to be long, uneven, and highly uncertain,” the IMF said.

Among the forecast concerns cited by the multilateral lenders were the premature withdrawal of fiscal and monetary supports, the impact on millions pushed into “extreme deprivation,” and lasting effects on jobs and investment.

Patches of weakness

Eleven-month readings of China’s economy for the past year point to a mix of positive signals and patches of weakness continuing into 2021.

In a sign of slower demand, China’s exports in November surged 21.1 percent, eclipsing import growth of 4.5 percent.

The results raised doubts about President Xi Jinping’s “dual circulation strategy,” which promotes consumption as the mainstay of the economy over traditional reliance on export-led growth.

Among signs of weakness in sectors that China has relied on for growth, mobile phone shipments fell 15.1 percent from a year earlier in November as 11-month deliveries slid 21.5 percent, the China Academy of Information and Communications Technology said.

Throughout the past year, the pace of industrial production has been running ahead of retail sales, pointing to a lag in consumption, subsidized output and softer recovery of demand.

Production and consumption have both been relatively slow- growing in China’s historical terms.

In November, for example, production climbed 7 percent from a year before, while sales of consumer goods rose 5 percent, slightly narrowing the gap from October, when output advanced 6.9 percent and sales gained 4.3 percent.

In the 11-month period, retail sales fell 4.8 percent from a year before. Auto sales rose 12.6 in November but remained down 2.9 percent over 11 months.

Similar patterns have been seen in surrogate indicators like electricity this year.

In November, power production rose 6.8 percent but edged up only 2 percent over the first 11 months. Monthly power consumption increased 9.4 percent but only 2.5 percent during the January-November period, the NBS and the National Energy Administration (NEA) said.

Vaccines set stage

November also saw an 0.5-percent drop in the consumer price index (CPI), although the government hastened to blame the first decline since 2009 on falling pork prices rather than disappointing demand.

Year-on-year readings of producer prices have been negative throughout 2020, presenting a typical symptom of
overproduction outpacing demand.

But the introduction of vaccines at the end of the year appears to be setting the stage for steadier growth.

Gary Hufbauer, senior fellow at the Peterson Institute for International Economics, cited several positive signs with the launch of vaccinations, the continuation of near-zero interest rates and more fiscal stimulus.

“For those reasons, I expect a brisk world economic recovery in 2021, loaded towards the second half,” said Hufbauer.

“The IMF forecast for China is high, but given the optimistic context I foresee, it seems plausible,” he said.

Among other China forecasts this month, accounting firm KPMG International Ltd. projected 2021 growth of 8.8 percent, adding a full percentage point to its estimate in November.

Fitch Ratings also raised its China forecast to 8 percent from 7.7 percent in September, citing expectations of greater recovery in demand and a stronger global environment boosted by the spread of vaccines, CNBC said.

The bullish outlooks may have to overcome a series of energy supply problems and electricity shortages that emerged in December, as prices for coal and liquefied natural gas (LNG) soared.

The disruptions could force the government to keep a lid on production during the winter months ahead.

Communist Party centennial year

But the government will be motivated to report world-leading economic results to celebrate the centennial year of the Communist Party of China (CPC), the success of Xi’s economic policies and its victory over COVID-19.

In November, state media declared success in its goal of ending extreme poverty by the end of 2020, removing the last of 832 impoverished counties from its poverty list despite the pandemic setback.

On Dec. 3, Xi declared that China had “accomplished its poverty alleviation target … and achieved a significant victory that impresses the world.”

Similar pronouncements are likely to accompany official economic reports next year. The triumphalism may make it harder to distinguish real growth from hype.

“The IMF and others don’t forecast China’s actual performance. They forecast what the NBS will announce,” said Derek Scissors, an Asia economist and resident scholar at the American Enterprise Institute in Washington.

“We’ll see political signals as to that early in 2021, but it will likely be in the 8-percent range for GDP. True GDP growth will also likely be in the 8 percent range, the main reason being that China is exaggerating growth now, so a bounce is still coming,” he said.

Scissors said that the NBS typically “smooths” its reporting to moderate abrupt changes due to economic disruptions, as during the Asian currency crisis in 1997-1998 and the global financial meltdown in 2008-2009.

China’s growth rate next year is unlikely to benefit from recovery abroad, Scissors said.

“The 2021 global recovery won’t help much because Chinese manufacturing is competitive during downturns and already largely recovered in the second and third quarters of this year,” he said.

“What will help is a boost to Chinese consumer confidence from vaccination,” said Scissors.

“Hype aside, demand has been weak the whole year, for obvious reasons. Given China’s COVID control measures, even a moderately effective vaccine will boost private consumption,” he said.