Wang Tao: Six Trends to Follow in China’s Economy in 2021
Wang Tao is the head of Asia economics and chief China economist at UBS Investment Bank.
We assume new coronavirus cases plunge globally in the second half of 2021, with the help of multiple vaccines. We expect U.S.-China relations to stabilize with no significant improvement, and assume the phase one trade agreement will continue to be implemented.
We see a global recovery helping to push China’s export growth to 10% in 2021, contributing to 8.2% of real GDP growth. We expect a decline in fiscal support and credit growth, a slight drop in China’s macro leverage, with the People’s Bank of China (PBOC) not really relying on higher interest rates to tighten monetary policy. Tightening should have a limited impact on growth, but could lead to more defaults and market volatility.
We foresee lingering regulatory headwinds for internet finance and some “monopoly” platform players, while support for innovation and technology self-reliance will remain. We see a moderate weakening of property sales and investment, and expect the yuan to strengthen to 6.2 against the U.S. dollar in 2021, but trade at 6.4 to the dollar by end of year.
Although the global recovery is likely to be led by domestic consumption, especially in services, the overall rebound should still support stronger demand for Chinese exports.
Even with improved work resumption in competing economies and a possible weakening of stay-at-home goods demand, we expect China’s exports to grow by 10% in dollar terms in 2021, compared with about 3% in 2020. The expected stabilization of U.S.-China relations and continued implementation of the phase one trade agreement should also help reduce trade and supply chain uncertainty.
Domestic consumption to rebound
We expect both employment and income growth to further recover in 2021, and consumer confidence to improve along with a reviving economy and control of the pandemic, especially after more people are vaccinated. As such, we see consumption growing by 10% in real terms in 2021, partly thanks to a low base in 2020, with consumer services reviving more notably (e.g. catering, travel, offline entertainment). Meanwhile, fixed-asset investment is likely to lag behind consumption, as fading policy support slows property and infrastructure investment, which offset the expected rebound in manufacturing capex.
Macro policy to tighten
As GDP growth rebounds strongly in 2021, we expect the government to focus more on containing financial risks and controlling macro leverage. In particular, we expect total social financing (TSF) credit growth to slow from 13.7% in November 2020 to 10.8% by the end of 2021, driven by softer bank lending and government bond financing as shadow credit comes more under control. Helped by strong nominal GDP growth, China’s debt-to-GDP ratio is expected to drop 2 percentage points after a 25 percentage point climb this year. We expect the budget deficit to fall to less than 3% of GDP while the broader augmented fiscal deficit will likely drop by more than 3.5% of GDP as many tax and fee cuts expire, and special local government bond issuances shrink.
The recent tightening of online lending regulations also reflects China’s increasing efforts to contain potential financial risks. Such moves and a negative credit impulse should have a limited impact on growth as improving corporate cash flows help lower credit demand and as the government financing gap narrows with the exit of supporting policies.
Strong earnings recovery meets tighter liquidity
With nominal GDP growth expected to rebound to 10.5%, corporate revenues and profits are likely to recover strongly as well. UBS’s Equity Strategy team expects earnings per share growth to reach 17% in 2021 for CSI 300 (21% for MSCI China) companies. Strong earnings growth and a decline in uncertainty should help boost business confidence and corporate capital expenditure spending in 2021.
However, for the equity market, the positive effect of improving corporate performance may be somewhat offset by tighter liquidity conditions in 2021, as the central bank fades monetary policy support and credit growth slows. Property policies and financial regulation are also expected to become more hawkish. Although underlying asset quality should start to improve in 2021, tightening of liquidity conditions, ending of the debt service moratorium and tax waivers for some companies, and tighter regulations will likely see corporate defaults and non-performing loans rise.
Support for innovation, regulatory headwinds prevail
In line with 14th Five-Year Plan proposals and the emphasis of the Central Economic Work Conference, more emphasis is expected on enhancing strategic science and technology capabilities and tech self-reliance in supply chains. Sectors that will be supported will likely include semiconductors and other key manufacturing bottleneck areas, renewable energy and new energy vehicles, and digital technology and related services. Meanwhile, platform companies and internet finance companies will face regulatory headwinds as the government pushes anti-monopoly regulations, implements more strict data collection and usage rules, and scrutinizes tech companies that engage in financial activities.
Yuan to appreciate further against a weak dollar
Following the yuan’s strengthening in the second half of 2020, the stabilization of U.S.-China relations and continued foreign portfolio inflows are expected to push the currency stronger against a weakening dollar. While the dollar/yuan rate is expected to trade around 6.4 at end of 2021, it may move close to 6.2 mid-year if the dollar weakens more than expected, and could fluctuate in a wide range depending on dollar cross rates and pandemic developments.
China’s expected sizable trade surplus, further portfolio inflows thanks to more index inclusion, and higher interest rates in China are all supportive for the yuan. Meanwhile, relaxation of controls on capital outflows and outright encouragement of yuan cross-border flows, and increased competitiveness of other assets as the global economy recovers may limit the strength of the yuan.
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Wang Tao is the head of Asia economics and chief China economist of UBS Investment Bank.
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