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    China’s Economic Growth: Post-Pandemic Overshoot Is Over

    Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
    January 04, 2021

    China has been a major contributor to global growth, and its economic activity tends to have significant repercussions for the global economy. To understand where the Chinese economy is in its growth cycle, we highlight several key charts below, which may also provide context for the impact of the coronavirus. China remains an important economic bellwether for countries that have started to reopen following the COVID-19 epidemic.

    Chinese Economy Health Check: PMIs


    Source: Bloomberg. Data as of December 31, 2020. Past performance is no guarantee of future results. Chart is for illustrative purposes only.

    China’s activity gauges (both official and Caixin) were softer than expected in December, suggesting that the post-pandemic overshoot might be over. Is there a reason for concern? Unlikely. China is one of the very few economies to post a positive real gross domestic product (GDP) growth in 2020 (around 2%), and all key Purchasing Managers Indices (PMIs) stayed well in expansion zone, pointing to a solid near-term outlook. The numbers also support the industrial reflation narrative (a big jump in the input price PMIs to 68.0) and the demand-side catch-up story.

    In a sense, we believe some pullback in China’s activity gauges may be a good thing, as this may reduce the need for an overly aggressive policy response (tightening) later on, and allow for a smoother and more gradual stimulus withdrawal in the coming months. And if growth headwinds were to intensify, China still has policy tools at its disposal to prop up domestic demand. China’s potential fiscal and monetary stimulus amounted to under 20% of GDP in 2020—well below the potential stimulus in the U.S. and the Eurozone (close to 50% of GDP).2

    We suggest that rather than obsessing about each and every decimal point change in China’s PMIs, the market should focus more on structural shifts in the Chinese economy, as these might have a more profound impact on growth and asset prices in the year(s) ahead. Three big changes currently underway are: (1) an anti-monopoly drive; (2) continuing tolerance of corporate defaults, which now expands to state-owned enterprise (SOE) issuers; and (3) China’s turning “greener”.

    As regards the first point, we should be hearing more in the coming weeks—the investigation of Alibaba Group can be an interesting test case.

    On the second point, headlines about SOE defaults pushed corporate spreads noticeably higher—especially for local SOEs. We believe allowing companies to default is not negative per se, as it helps price discovery, improves transparency, and reduces moral hazard. However, financial stability considerations are also important—even though the actual number of defaults was not that high—so this can be a delicate balancing act for regulators.

    Understanding the Credit Cycle: Borrowing Costs Higher


    Source: Wind, UBS. Data as of December 21, 2020. Past performance is no guarantee of future results. Chart is for illustrative purposes only. Spreads are measured relative to average yield of 1, 3, 5, and 10 year bonds issued by the China Development Bank.

    Finally, China’s December announcement that it will boost the share of non-fossil fuels in primary energy consumption to 25% by 2030 was notable for a number of reasons.3  China’s earlier “green” push had been linked to slower growth, so the new—higher—target raises more questions about its future GDP trajectory. China’s green ambitions and the resulting shift in its commodity demand—in particular for oil (lower?) and metals (higher?) —will also have fundamental and market implications for wider emerging markets in the years to come. Note that the consensus now expects China’s real GDP growth to slow to 5.5% in 2022, and the more aggressive green policy might be a reason why.


    1Purchasing managers index (PMI) is an economic indicator derived from monthly surveys of private sector companies. A reading above 50 indicates expansion, and a reading below 50 indicates contraction. We believe PMIs are a better indicator of the health of the Chinese economy than the gross domestic product (GDP) number, which is politicized and is a composite in any case. The manufacturing and non-manufacturing, or service, PMIs have been separated in order to understand the different sectors of the economy. These days, we believe the manufacturing PMI is the number to watch for cyclicality.

    2Source: Cornerstone Macro

    3Source: Deutsche Bank Research

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