China: Economy continues to gain speed in the fourth quarter
January 18, 2021
The economy continued to recover in the fourth quarter, expanding 6.5% in annual terms (Q3: 4.9% year-on-year) and outpacing market expectations of 6.1% growth. Seasonally-adjusted quarter-on-quarter GDP rose 2.6% in Q4, following the 3.0% expansion in Q3. That said, data for the month of December was more mixed, with retail sales, credit growth and PMI readings all losing steam.
Although the National Bureau of Statistics (NBS) does not provide a breakdown of GDP by expenditure, available data suggests the external sector likely supported activity in the fourth quarter, amid booming exports of medical equipment and technology devices. Moreover, stronger private spending, amid improving consumer confidence and a lower unemployment rate, should have underpinned momentum, while investment and industrial activity also gained ground in the fourth quarter.
Looking ahead, the economy’s performance in Q1 2021 will be supported by an incredibly favorable base effect. Moreover, exports should stay robust as pandemic-related goods remain in high demand. However, the recent outbreak of coronavirus in Northern China, centered on Hebei province—and localized restrictions to contain the spread—could dent services activity somewhat.
On the outlook, Samuel Tse, economist at DBS Bank, commented:
“On entering 2021, investment will remain as the prime growth engine. Amongst all, new infrastructure investment […] will see stunning growth alongside Beijing’s push for self-reliance in technology. In fact, it rose by 12.5% for 2020, outpacing the mild growth of the overall headline figure. We expect the GDP will grow by 12.0% in 1Q21 and 7.0% for the entire year. However, investors should note the following three downside risks that could potentially impact the growth outlook: (i) Temporary electricity shortage in 1Q amid cold weather. (ii) Renewed Covid outbreak – total daily new cases were over 100 on entering mid-January. This is particularly alarming as Chinese New Year is approaching. (iii) Increasing debt risks.”
Regarding the evolution of relations with the U.S.—which could have an important bearing on the external sector, as well as private investment—Iris Pang, chief China economist at ING, stated:
“We expect the newly elected U.S. government will continue most of the current policies on China, at least for the first quarter. That means tariffs and technology measures on China will still be in place. The most positive development we can envisage is that tariffs could be reduced gradually over 2021 with no additional pressure on the technology side. It is difficult to conceive of a dramatic improvement in the U.S. attitude towards China's technological advancement.”
Author: Oliver Reynolds, Economist