China’s economy may expand by 9 per cent in 2021, helping to overtake US sooner
- China was the first major economy to show a recovery from the damage caused by the coronavirus pandemic in 2020, largely due to a series of stimulus measures
- Nomura and China International Capital Corporation put China’s gross domestic product growth for 2021 at 9 per cent
China’s economic growth could reach as high as 9 per cent next year, and its rapid rebound from the coronavirus pandemic may help the economy overtake the US to become the world’s largest later this decade, analysts said.
But Beijing is likely to roll back some of its stimulus measures used to offset the coronavirus damage amid concerns over its record-high debt level, they added.
In contrast, many other countries have been forced to resume lockdown measures to control the spread of the coronavirus.
Even though China’s exports remain resilient this year, it could face problems from poor global economic outlook and shrinking international trade
China’s recovery has seen a number of brokers, including Nomura and China International Capital Corporation (CICC), predict its gross domestic product (GDP) growth for 2021 will be 9 per cent.
However, the Chinese Academy of Social Sciences (CASS), a Beijing-based think affiliated with the State Council, cautioned that weak consumption, unemployment and the ongoing struggle among small to medium-sized companies are likely to be major obstacles to growth going forward.
“Even though China’s exports remain resilient this year, it could face problems from poor global economic outlook and shrinking international trade,” CASS said in its 2021 China economy forecast.
“Debt growth and high interest rates are also a risky combination, adding to China’s overall debt pressure. The situation of fiscal expenditure not being matched by fiscal revenue is becoming worse, and the proactive fiscal policy is looking tired.”
China is now expected to be the only Group of 20 nation to show a positive economic growth rate in 2020, predicted to be 1.9 per cent by the International Monetary Fund (IMF) and 2.0 per cent by the World Bank.
Its growth rate is expected to increase sharply in 2021 due to both the continued strong recovery and the low 2020 base for comparison. The IMF then expects China’s GDP growth to be 8.2 per cent next year, while the Organization for Economic Co-operation and Development (OECD) places it at 8 per cent.
The World Bank and CASS each project a slightly lower growth rate of 7.8 per cent.
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In its latest global outlook, Standard Chartered Bank projects China’s GDP growth to accelerate to 8 per cent in 2021, adding that year-on-year growth may surge to 18 per cent in the first quarter due largely to the low base following the historic contraction earlier this year, rather than real economic activity.
China’s GDP growth rate last rose above 8 per cent in 2011, reaching 9.55 per cent.
To rescue its coronavirus-hit economy earlier this year, China unleashed a flurry of stimulus measures, including increasing the issuance of special treasury bonds to fund infrastructure investment by local governments and tax cuts that lifted the fiscal deficit ratio to a record high of 3.6 per cent of GDP.
Analysts have warned that the extra liquidity may fuel asset bubbles and that the sharp increase in government borrowing adds pressure to the country’s already high public debt level.
The measures, however, did not significantly lift consumer demand, which remains a weak spot in the Chinese economy, with retail sales lagging behind the recovery witnessed in the manufacturing sector.
Chinese regulators are increasingly concerned over the fallout from the emergency measures introduced early this year, which sent its debt-to-GDP ratio up to 266.4 per cent from 245.4 per cent in the first half of 2020, according to CASS.
CASS expects China’s debt-to-GDP ratio to hit 275 per cent this year, driven by a rapid growth of local government debt.
Helen Qiao, head of Asia economic research at Bank of America Merrill Lynch, said China will lower its fiscal deficit target back to 3 per cent from 3.6 per cent in 2020 to keep its leverage under control.
A recent series of defaults by state firms controlled by local governments have also raised questions over their finances, which are expected to deteriorate further in 2021.
“The fiscal situation of local governments has worsened in the past few years driven by local government financing vehicles (LGFV). The challenges have further exacerbated after the Covid-19 shock from both on-balance sheet and LGFV bonds,” said French bank Natixis, adding that the heavier local government debt burden will remain a concern as the economy is expected to decelerate structurally after the technical rebound in 2021.
Analysts are divided on whether China’s consumer demand will return to pre-pandemic levels even with Beijing promoting its dual circulation strategy which places more emphasis on domestic consumption and home-grown innovation.
The recovery in domestic consumption is being delayed. The pressure to expand domestic consumption is huge
“Private consumption is likely to catch up, compensating for the loss in 2020, investment should accelerate, led by manufacturing as part of the dual circulation strategy, and the government’s push on infrastructure to deliver stable growth should continue,” added Nomura.
CASS, however, said that the strength of the consumption rebound will depend on whether there are enough new jobs for migrant workers, the speed of recovery in the service sector, such as aviation, and the level of household debt, which has also grown rapidly this year.
“The recovery in domestic consumption is being delayed,” CASS added. “The pressure to expand domestic consumption is huge.”
Additional reporting by Orange Wang
