OUTLOOK MODERATES The economic recovery continues to gain traction, despite a challenging external environment, mostly due to solid dynamics...

Forecast - China - September 20, 2020

The economic recovery continues to gain traction, despite a challenging external environment, mostly due to solid dynamics at home. Retail sales returned to growth in August as consumers gradually came back and cross-provincial travel increased. Investment activity improved in the same month, reflecting gains in both traditional and new infrastructure projects. The new infrastructure initiative, which was rubberstamped during May’s National People’s Congress, seeks to upgrade China’s industries and accelerate digital transformation. Industrial production growth also picked up in August, led by gains in advanced technologies. Although the external sector continued to fare well in August, risks are looming on the horizon as some of China’s main trading partners are suffering heavily from the consequences of the pandemic. • Growth prospects have been improving in recent months, reflecting a stronger-than-expected recovery. Looking forward, the economy will benefit from strong overseas demand for medical products and technological devices as well as solid new infrastructure investment. A re-escalation of trade tensions with the U.S. and a second wave of Covid-19 are the main downside risks. FocusEconomics panelists see the economy growing 2.0% in 2020. GDP growth will accelerate to 7.6% in 2021, which is down 0.1 percentage points from last month’s forecast. • Inflation fell to 2.4% in August from 2.7% in July. The moderation mostly reflected a base effect from last year when pork and meat prices surged due to the African swine fever outbreak. Looking forward, inflation is expected to remain broadly at current levels. The drop in factory gate prices continued to narrow due to higher prices for some raw materials. FocusEconomics panelists forecast that inflation will average 2.8% in 2020 and 2.1% in 2021, which is unchanged from last month’s estimate. • The People’s Bank of China (PBOC) has refrained from adding monetary stimulus in recent weeks as the economy appears to be on a path to recovery. The PBOC uses a complex system to implement monetary policy, including key benchmark rates and reserve requirement ratios. Panelists project the one-year deposit and loan prime rates to end 2020 at 1.48% and 3.68%, respectively, and 2021 at 1.47% and 3.65%. • The yuan appreciated in recent weeks and it is currently trading at levels last seen in May 2019. This reflects China’s solid economic recovery compared to other major economies. On 18 September, the yuan traded at 6.77 CNY per USD, appreciating 2.3% month-on-month. Looking forward, the yuan could depreciate slightly due to an uncertain global economic backdrop. Our panelists see the yuan ending 2020 at 6.96 CNY per USD and 2021 at 6.94 CNY per USD

Manufacturing PMI inches down in August The manufacturing Purchasing Managers’ Index (PMI) published by the National Bureau of Statistics (NBS) and the China Federation of Logistics and Purchasing (CFLP) fell slightly from 51.1% in July to 51.0% in August. The print was a notch below the 50.2% expected by market analysts. As a result, the index remained above the 50.0% threshold that separates expansion from contraction in the manufacturing sector. August’s decrease was the result of lower readings for output and inventories. Conversely, new orders and job prospects gained some ground, while the supplier delivery time index was unchanged compared to the previous month. Despite remaining below the 50% threshold, export orders increased again in August, reflecting the easing of the global lockdown. Meanwhile, input prices—a reliable leading indicator for producer inflation—jumped to a nearly two-year high. Panelists expect GDP to expand 2.0% in 2020, which is up 0.1 percentage points from last month’s estimate. In 2021, the panel foresees much stronger economic growth of 7.6%, which is down 0.1 percentage points from last month’s projection. REAL SECTOR | Industrial output posts quickest growth since December 2019 in August Industrial output grew 5.6% compared to the same month of the previous year in August, which was above July’s 4.8% increase. The reading marked the best result since December 2019 and exceeded the 5.1% increase that market analysts had expected. Looking at the details of the release, manufacturing output was steady in August, while energy output gained steam and the mining sector posted a healthy rebound. On a monthly basis, factory output grew 1.0% in seasonally-adjusted terms in August, which matched July’s expansion. Meanwhile, the trend improved slightly, with the annual average growth of industrial production coming in at plus 1.6%, up from July’s 1.5% reading. In light of recent developments, some panelists upgraded their view on the Chinese economy. Raymond Yeung, Greater China Chief Economist at ANZ, comments that: “We have revised upward our forecast for China’s GDP growth to 2.1% (+0.3ppt) for 2020 on the back of a robust recovery in the services industry, thanks to news that China will have COVID-19 vaccines ready by year-end. In addition, the macro data suggest that GDP growth actually expanded 0.8% over the first eight months, or for two-thirds of the year.” FocusEconomics Consensus Forecast participants expect industrial production to rise 1.9% in 2020, which is down 0.1 percentage points from the previous month’s forecast. In 2021, the panel sees industrial production growth at 7.5%, which is up 0.1 percentage points from last month’s projection.

New loans increase in August In August, Chinese banks distributed CNY 1.28 trillion (USD 187 billion) in new yuan loans. The reading came in above both the CNY 993 billion recorded in July and the CNY 1.22 trillion that market analysts had expected. In the 12 months up to August, new yuan loans totaled CNY 19.2 trillion (12 months to July: CNY 19.2 trillion). Total social financing (TSF)—a broader measure of credit and liquidity in the economy that includes loans, bonds and other non-traditional instruments— rose from CNY 1.69 trillion in July to CNY 3.58 trillion in August. Market analysts had expected a softer increase in TSF to CNY 2.59 trillion. Annual growth in M2—the broadest measure of money supply in China— decreased from July’s 10.7% to 10.4% in August. The result was below the 10.7% increase that market analysts had expected. The slowdown in M2 growth reflected more targeted monetary policy in order to prevent bubbles in assets like real estate and stocks. FocusEconomics Consensus Forecast participants expect M2 to expand 11.0% in 2020, which is up 0.1 percentage points from last month’s forecast. In 2021, the panel sees M2 growth of 8.8%, which is unchanged from last month’s projection.

Export growth continues to accelerate in August as lockdowns ease across the world In August, exports expanded 9.5% over the same month in the previous year, following July’s 7.2% rise. Moreover, the print exceeded 7.1% expansion that market analysts had expected. Meanwhile, imports fell 2.1% in annual terms in August. The print followed the 1.4% drop in July and contrasted the 0.1% increase that market analysts had projected. August’s solid export result reflects the gradual easing of the global lockdown as well as a favorable base effect from last year. As a result of the stronger expansion in exports, the trade surplus jumped from USD 34.7 billion in August 2019 to USD 58.9 billion in August 2020 (July 2020: USD 62.3 billion surplus). The 12-month moving sum of the trade surplus rose from USD 431 billion in July to USD 455 billion in August. Our panelists forecast that exports will contract 3.8% in 2020 and imports will drop 3.9%, bringing the trade surplus to USD 406 billion. In 2021, FocusEconomics panelists expect exports will expand 7.5%, while imports will rise 8.3%, leaving the trade surplus at USD 421 billion.

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