Looking ahead to China's economic prospects in 2021, UBS Wealth Management's Office of Chief Investment Officer (CIO) believes that:
China's economy will continue to recover, with GDP growth expected to rise from around 2% in 2020 to around 8%, mainly driven by investment and consumption, and export growth likely to exceed expectations.
Government policy should continue to support growth but begin to return to normalisation, with targeted easing measures to combat the epidemic being phased out in 2021. Fiscal policy should continue to be targeted to support specific sectors, including Urbanization 2.0, new infrastructure and the green economy. The central bank should keep liquidity reasonably ample, but monetary policy is not expected to be broadly loose.
Against the backdrop of expectations that Sino-US/multilateral tensions will persist for a long time, China has focused on a new pattern of "dual cycles" of development, focusing on security, high-quality growth, and market reform and opening up.
The year 2021 marks the beginning of China's 14th Five-Year Plan. The announced outline and vision for 2035 set the tone for medium - and long-term policy priorities, spanning the economy, science and technology, governance, culture, environment and market openness. Policymakers expect China to join the ranks of high-income countries by 2025 and to double its real GDP, or per capita national income, by 2035.
The CIO believes that China's economic recovery will continue in 2021, with GDP growth picking up to around 8% from a trough of around 2% in 2020, mainly driven by investment and consumption, with exports also expected to surprise. After that, GDP growth could slow to 5.0% to 5.5% in 2022-2025. China is still likely to be the world's growth engine and the world's largest market, with a population of 1.4bn and a middle class of more than 400m.
Easing returns to normalisation in 2021
Policy is still supportive
Government policy is likely to remain supportive of growth, given the bumpy road to recovery and continued tensions between China and the United States.
Overall, China's fiscal measures in 2020 are estimated to be 7-8 per cent of GDP, mainly consisting of special anti-epidemic Treasury bonds and local government bonds, to provide subsidies and infrastructure investment to affected industries and enterprises. The CIO believes that special relief measures for the new crown will be phased out in 2021.
Fiscal policy supports new infrastructure and a green economy
The fiscal policy in 2021 will continue to provide targeted support to related industries. The CIO expects the fiscal deficit target to be set at around 3% of GDP in 2021, down from "at least 3.6%" in 2020. Total local government bond issuance in 2021 is likely to be between Rmb4.5tn and Rmb5tn. The key sectors to support are likely to be consistent with the key issues highlighted in the 14th Five-Year Plan, including urbanization 2.0, smart infrastructure, and green economy.
Monetary easing will normalise
Monetary policy remains generally supportive, but is not expected to be fully accommodative in 2021. The People's Bank of China will continue to maintain reasonably sufficient liquidity and make fine-tuning adjustments in light of economic development. The CIO sees policy rates remaining largely unchanged, with moderate upward pressure on rates in the second half of 2021 if economic growth continues to be strong. The CIO also expects credit growth to remain relatively high at more than 11 per cent year-on-year in 2021, but to fall gradually from a multi-year high of 13.5 per cent in 2020.
A new round of antitrust regulatory tightening began in November, raising fears that easy money will be abruptly withdrawn and credit will be sharply tightened. The CIO thinks such fears are overdone. These regulatory measures are mainly aimed at online small and micro loan companies and Internet platform companies, aiming to prevent monopolies, plug regulatory loopholes and prevent systemic financial risks.
Economic activity will pick up in 2021
China's GDP growth is expected to pick up from around 2% in 2020 to around 8% in 2021, mainly driven by consumption and investment, with exports also expected to surprise. China's road to recovery is a "two-speed" pattern: first, a recovery in production and investment, followed by rapid increases in consumption and services across the board. The full recovery is likely to continue into 2021.
Consumption will grow in low double digits in 2021
After a single-digit decline in mid-2020, China's total retail sales of consumer goods are expected to achieve low double-digit growth in 2021 and become the main driver of GDP growth. CIO expects that under the new development pattern of "double cycle", more policies to boost consumption will be introduced to unleash the potential of domestic demand and stabilize the supply chain.
Fixed asset investment (FAI) growth is expected to rebound to high single digits in 2021 from low single digits in 2020, led by infrastructure and real estate as well as continuously improving manufacturing investment, although the real estate FAI is likely to slow after strong growth.
In 2020, the FAI of real estate continues to outperform the overall FAI growth, and the monthly year-on-year growth rate has been maintained at about 10% since the third quarter, rebounding sharply from a monthly decline of nearly 8% in the first quarter. Easy credit policies and strong backlog demand are the main drivers. Looking ahead, this upward trend is likely to be limited by tighter regulations on developer financing. The CIO expects real estate fixed asset investment to continue to grow at a relatively healthy rate, although it may slow from 2020.
Exports will remain resilient in 2021
China's exports are expected to grow in high single digits in 2021, and may even reach low double digits if rapid progress in vaccine research and development leads to a stronger global economic recovery.
Exports have continued to heat up in 2020, beating market expectations almost every month since March and growing in the high single to low double digits since July. The CIO believes that China's import growth will catch up in 2021 on the back of domestic demand recovery and the continued implementation of the first phase of the trade agreement between China and the United States.
CPI will remain moderate in 2021
We expect consumer price inflation to remain low at around 2 per cent in 2021, down from around 2.5 per cent in 2020, in an environment of moderating food price inflation led by pork and moderate non-food price growth. The CPI rose more than 4 per cent in the first quarter of 2020, mainly due to high pork prices and the impact on food supplies caused by the outbreak of the New World outbreak.
The US-China/multilateral relationship remains an important risk
Even if Biden takes office, Sino-U.S. trade tensions will not end there. Because the United States views China as a strategic competitor, and its hawkish stance toward China enjoys bipartisan support.
CIO believes that China's response to the United States has been more restrained, more focused on the "double cycle" of new development pattern, focusing on security, high-quality growth, market reform and opening up and other policy points emphasized in the 14th Five-Year Plan.
Trade disputes
The first phase of the US-China trade agreement, reached in early January 2020, has helped ease trade tensions between the two countries. Despite the impact of the outbreak, we believe China remains committed to completing the agreement. As of November last year, China had already achieved nearly half of its 2020 target for purchases of US goods, including nearly 70% of its target for purchases of key agricultural products.
This year, China has emphasized a new pattern of development featuring domestic cycles as the mainstay and mutually reinforcing domestic and international cycles. The "inner circle" aims to unleash potential domestic demand and stabilize supply chains, while the "outer circle" aims to improve connectivity and strengthen collaboration with international markets. Against this backdrop, China needs to strengthen partnerships with other countries and establish more free trade zone agreements to maintain supply chain stability.
The dispute of science and technology
Since 2018, the US has imposed a series of foreign investment restrictions and export controls on China.
The tussle between China and the United States has prompted China to speed up its localization. According to CIO, China has been successful in manufacturing telecommunications equipment and hardware, but still has a long way to go in advanced semiconductor manufacturing processes. The government has made technological innovation and self-sufficiency a top priority, and the CIO expects more measures to be introduced to develop indigenous technologies, particularly semiconductor technology and advanced manufacturing, and to strengthen intellectual property protection.
Financial tension
China has taken a series of important financial liberalization steps since 2018, in part in response to longstanding U.S. demands to open up financial markets within China. Restrictions on foreign ownership in most financial sectors, including insurance, securities, futures and public offering funds, will be lifted from April 2020, meeting the timetable required in the first phase of the trade agreement. China has also reduced the negative list of foreign investment, established more free trade zones, and pledged to expand the scope of trial opening of the service sector.
Geopolitical tensions
The CIO said that in the second half of the year, the Chinese government remained mostly calm and restrained in dealing with the geopolitical challenges raised by the Trump administration. After Biden takes office, the Chinese government will watch and understand the new administration's position before taking countermeasures. While the United States is likely to take tougher measures that could further strain Sino-U.S. relations, we expect both sides to avoid extreme measures that could undermine the post-outbreak economic recovery.
