Short Insight – China: a targetless rebound

  • We cut 2020 growth forecast from 3.0% to 2.0% on ‘targetless’ NPC and DM cuts
  • … while raising our 2021 growth forecast from 6.5% to 7.0% on base effects
  • Stimulus will be stepped up, but not a ‘credit bazooka’ like during GFC
  • Rebound from Covid-19 led by industry; some services sectors lagging behind
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1.     Cutting our 2020 growth forecast on ‘targetless’ NPC and DM cuts

Last Friday, China’s key annual political gathering – the National People’s Congress (NPC) – took off. The NPC usually convenes in early March, but was delayed due to the Covid-19 outbreak. This year – for the first time in three decades – the NPC did not adopt an annual growth target given the uncertainties to the global outlook. While that seems understandable under current conditions, it also signals that Beijing will not do ‘whatever it takes’ to guarantee a certain growth pace or range. Sure, Beijing will significantly step up fiscal and monetary stimulus (in line with our base case). That said, this stimulus is not fully comparable to the ‘big bang’ package launched during the Global Financial Crisis, nor to the extra-ordinary support laid out in key advanced economies. Besides, external headwinds have risen. We recently cut growth forecasts for DMs (e.g. eurozone, UK) sharply down further. Moreover, US-China tensions are flaring up again, with recent developments in Hong Kong adding oil to the fire. Also taking into account the weak Q1 print (-6.8% yoy), we cut our 2020 China growth forecast from 3.0% to 2.0%. We raised our 2021 forecast from 6.5% to 7.0%, with the improvement in full-year growth mainly reflecting base effects. We should add that these growth estimates are still surrounded by a larger range of uncertainty than usual, given the specifics of the Covid-19 crisis.

2.   More fiscal and monetary stimulus announced in NPC

The NPC shows that policies will focus on safeguarding employment and poverty alleviation. Official unemployment is targeted at 6% (2019: 5.5%), but will be higher in reality. The fiscal deficit target will be raised from -2.8% of GDP in 2019 to -3.6% in 2020, but that does not capture the full extent of fiscal stimulus. The ‘effective’ fiscal deficit (that also takes into account the drawdown of fiscal reserves) is estimated to rise from around 5% of GDP in 2019 to 6.5% in 2020. What is more, the central government will issue RMB 1 trillion in special bonds to finance (mainly public health related) infrastructure projects. The 2020 quota for the issuance of special local government bonds will be almost doubled, to CNY 3.75 trillion. On the monetary front, an inflation target of 3.5% has been adopted for 2020 (in line with our forecast). Beijing aims at an acceleration of credit growth. We expect the PBoC to continue with cutting several policy rates, but to refrain from rolling out a ‘credit bazooka’ as it did during the global financial crisis. Policy makers will tolerate some releveraging, but not too much.

3. April activity data confirm an industry-led rebound

The monthly activity data for April confirm the picture of an industry-led rebound, with services (particularly some consumer-related services) lagging but gradually normalising. Composite PMIs from both NBS and Caixin rose compared to March, although Caixin’s PMIs remain below 50 (particularly services). Industrial production growth was back in positive territory at 3.9% yoy (March: -1.1%). Car production has recovered sharply since the trough in February and was back at -4.4% yoy in April (February: -83%!). Construction is also holding up nicely. That said, domestic demand remains quite subdued, although improving over the past few months. Retail sales (-7.5% yoy) and fixed investment (-10.3% yoy ytd) remained in negative territory, but much less so than in March (-15.8% vs -16.1%). Imports deteriorated (-14.2% yoy vs -1.0% in March), while exports surprised to the upside (+3.5% yoy vs -6.6% in March) likely reflecting the suspension of flows from previous supply disturbances. All in all, the April data show that China’s rebound is quite ‘on track’, although rising external headwinds may well show up in coming months.

4. Some services take more time to recover from Covid-19 shock

As we also highlighted in our latest China Watch, Restart and rebound, published end-April, services (particularly transport, catering and entertainment) have been the epicentre of China’s Covid-19 shock. Although the services sector also shows signs of a rebound (as illustrated by the services PMIs), pockets of weakness remain. That is particularly true for consumer-related services, while production-related services are doing better. While the road congestion index in the four tier-one cities (Beijing, Shanghai, Guangzhou, Shenzhen) is more or less back to pre-corona levels, nationwide passenger transportation data (by road, railway, air and waterway) show a pick-up but remain clearly below pre-corona levels. Catering-related services are still way below normal capacity as well. In April, catering-related spending was still down more than 30% yoy, versus  -7.5% for overall retail sales. The weakness of these sectors points to a still cautious consumer despite the easing of restrictions, as well as to the impact of remaining social distancing practices. The rise in unemployment and a fall in discretionary income for many consumers also plays a role. We expect consumption to gradually normalise helped by the stepping up of stimulus measures. The rebound of China’s consumer confidence to 122.2 in March (from a 17-month low of 118.9 in February) also points in that direction.