The Chinese economy is in the midst of a period of major adjustments. They arose after Beijing tightened regulations in a variety of sectors, from housing to certain new technologies and activities linked to the societal challenges facing the country. The adjustments can also be attributed to the debt excess problem of some state-owned and private enterprises, and reflect the authorities’ determination to tighten their access to credit and to clean up practices in the financial sector. As a result, an increasing number of corporates is defaulting, and the troubles of the property developer Evergrande are symptomatic of the changes under way
China’s public finances have been deteriorating for several years now, and the trend accelerated in 2020 with the Covid-19 crisis. Reforms introduced since 2014 have made the public sector’s accounts more transparent and improved the management of local governments’ budgets and debt. However, those changes have not stopped fiscal imbalances building up. In addition, large quasi- and extra-budgetary operations exist alongside the official budget, and there are many, sometimes opaque, links between the various public-sector entities. This means that analysing the public finances is often a complicated exercise.
China’s economic growth slowed sharply over the summer. Lockdown measures reintroduced in response to the resurgence of the Covid-19 pandemic and the threat of the new Delta variant dealt another blow to private consumption. Growth in retail sales volumes dropped to 6.4% year-on-year in July and then to 0.9% in August, from an average of 11.9% in Q2 2021.
Economic growth reached 7.9% year-on-year (y/y) in Q2 2021 vs. 18.3% in Q1 2021. This apparent slowdown is the result of growth rates gradually returning to normal in all sectors and all demand components; it was largely expected as base effects have become less favourable since last spring. This trend explains the contraction of the blue area compared to the dotted area in our Monthly Economic Pulse.
Economic growth rebounded very rapidly following the Covid-19 shock, but this rebound has also been characterised by mixed performances between sectors and between demand components. Growth of industrial production and exports accelerated vigorously until early 2021 and is now gradually returning to normal. Meanwhile, the services sector and private consumption were slower to rebound, and their recovery still proved to be fragile in Q2 2021. Consequently, the authorities are likely to be increasingly cautious about tightening economic policy. Even so, they should still give priority to slowing down domestic credit growth and adjusting the fiscal deficits.
After a very strong post-Covid rebound, industrial production growth rates continue to normalize (+8.8% year-on-year in May). Export growth has also turned lower but is still very strong (+27.6% y/y in value terms). Meanwhile, recovery in the services sector and private consumption continues but remains much more fragile.
Foreign investors have significantly increased their purchases of Chinese local bonds since Q2 2020, targeting sovereign papers particularly. In fact, foreigners are currently holding only 3% of the total stock of Chinese local bonds, but 10% of the total stock of central government papers. Foreign investors’ holdings of local bonds increased by RMB 120 bn per month in average from April 2020 to February 2021, against +RMB41 bn in the previous twelve months. This dynamic suddenly stopped last March. It should resume in the short term, yet without returning to the 2020 levels. Several factors account for these recent foreign investment flows: the increase in local yields and the widening spreads with US Treasury yields (yields on Chinese ten-year sovereign bonds rose from 2
According to the latest PMI numbers and economic data, growth in the Chinese economy has remained solid in the early part of Q2 2021, boosted in particular by exports. Activity in the domestic market lost a bit of steam in April, but is expected to bounce back again in the short term.
Real GDP growth reached 18.3% year-on-year in Q1 2021 and 0.6% in quarter-on-quarter seasonally-adjusted terms (according to China’s NBS). The latest activity indicators as well as our economic Pulse are strongly biased by major base effects between the first months of 2020 (when lockdown measures brought business to a standstill) and the first months of 2021.
At the end of the annual “Two Sessions”, China’s major political event, Beijing announced its economic targets for 2021 as well as the priorities of its new five-year plan. By setting this year’s real GDP growth target at simply “more than 6%”, which is lower than forecasts, the authorities are signalling that the economic recovery following the Covid-19 crisis is no longer the main focus of concern. In the short term, they will continue to cautiously tighten monetary policy and gradually scale back fiscal support measures. Above all, the authorities have affirmed their medium-term development strategy, which aims to boost innovation and drastically expand China’s technological independence.
According to the latest indicators, China’s economic recovery remained strong over the first two months of 2021, although there was a slight slowdown in the domestic demand growth momentum...
Economic growth reached 2.3% in 2020. Activity has rebounded rapidly since March and the recovery has gradually spread from industry to services. Infrastructure and real estate projects continue to drive investment, but it is also beginning to strengthen in the manufacturing sector, encouraged by solid export performance. Private consumption is still lagging, but yet has picked up vigorously since the summer. Whereas fiscal policy should continue to be growth-supportive in the short term, the monetary authorities are expected to adjust their priorities. Credit conditions should be tightened slowly, especially via the introduction of new prudential rules. Corporate defaults are likely to increase alongside efforts to clean up the financial sector
Economic activity has rebounded rapidly since March and has gradually spread from industry to services. Infrastructure and real estate projects continue to drive investment, but it has also begun to strengthen in the manufacturing sector as well, encouraged by solid export performance. Lastly, private consumption is still lagging, but yet has picked up vigorously since the summer. Whereas fiscal policy should continue to be growth-supportive in the short term, the monetary authorities are expected to adjust their priorities and return their focus on controlling financial risks. Credit conditions should be tightened slowly, especially via the introduction of new prudential rules. Corporate defaults are likely to increase alongside efforts to clean up the financial sector.
The latest economic indicators show that the recovery in Chinese growth continued to strengthen in October. As seen in our monthly Pulse, the expansion of the blue area compared to the dotted area shows a more widespread recovery in activity in August-October than in the three previous months...
China’s economic dynamics have remained the same in the past three months, i.e. the recovery has continued and strengthened gradually. As a result, real GDP registered positive growth of 0.7% y/y in the first three quarters of 2020, and 4.9% y/y in Q3 alone. The main economic sectors all reported positive growth in the first three quarters: +2.3% in the primary sector (vs. 3.1% in 2019), +0.9% in the secondary sector (vs. 5.7% in 2019) and +0.4% in the tertiary sector (vs. 6.9% in 2019). These data underline both the solid capacity of the Chinese economy to rebound after the Q1 shock, and the greater fragility of the services sector, where the recovery has started later and been slower than in the industrial sector...
The economy continues to recover. Initially driven by a rebound in industrial production and investment, the recovery broadened over the summer months. Exports have rebounded and activity has also picked up in the services sector. Yet it continues to be strained by the timid rebound in household consumption, which is far from returning to normal levels. The unemployment rate began to fall right again after the end of lockdown measures, but this decline has been accompanied by an increase in precarious jobs and large disparities, with the unskilled and young college graduates being particularly hard hit.
China’s economic dynamics continued to improve in August 2020. As seen in our monthly Pulse, the expansion of the blue area compared to the dotted area shows a more widespread recovery in activity. Whereas the improvement since March was initially driven by the rebound in industrial production and investment in public infrastructure and real estate, it has now reached other parts of the economy [...]
Activity indicators for July reflected the continued recovery of the Chinese economy. Real GDP growth already rebounded to 3.2% year-on-year in Q2 2020, up from a 6.8% contraction in Q1. The acceleration in investment growth since March has been driven mainly by public infrastructure projects, the construction and the real estate sectors, which have been supported by the government’s stimulus measures. Manufacturing investment has recovered more slowly, held back by the financial difficulties of corporates, particularly amongst SMEs. In the second half of 2020, investment in public infrastructure is set to remain strong, helped by continued expansionary fiscal policy
China’s economic dynamics continued to improve in June. In fact, real GDP rebounded by 11.5% quarter-on-quarter (-3.2% year-on-year), which was strong enough to completely regain the ground that was lost in Q1...
The economy has been recovering gradually since March, and the rebound in real GDP was strong enough in Q2 2020 to enable it to recover rapidly the ground lost in Q1. Yet the shock triggered by the pandemic and the ensuing lockdown measures has severely weakened some sectors (such as export-oriented industries), some corporates (notably micro-enterprises and SMEs) and some households (especially low-income earners). The central bank has cautiously eased credit conditions and the government has introduced a stimulus plan estimated at about 5 points of GDP for 2020. Public investment in infrastructure projects remains the instrument of choice, but direct support to corporates and households is also expected to boost private demand.
The economy has been recovering gradually since March, and the rebound in real GDP should be strong enough to enable it to recover rapidly the ground lost in the first quarter. Yet the shock triggered by the pandemic and the ensuing lockdown measures has severely weakened some sectors (such as export-oriented industries), some corporates (notably micro-enterprises and SMEs) and some households (especially low-income earners). The central bank has cautiously eased credit conditions and the government has introduced a stimulus plan estimated at about 5 points of GDP for 2020. Public investment in infrastructure projects remains the instrument of choice, but direct support to corporates and households is also expected to boost private demand.
China is the world’s second economy. It is also the world’s largest exporter of goods, a global industrial leader and a global financial player. The process of capital account liberalisation and renmimbi (RMB) internationalisation continues gradually and the opening of local asset markets to non-resident investors made rapid progress in the recent past. Meanwhile, controls over resident capital outflows remain significant.
China’s exchange rate regime is a managed float. The Chinese currency has gradually become more flexible and market-determined in recent years, but government discretion keeps significant influence on the direction of the fx rate. The RMB was included as the fifth currency in the IMF Special Drawing Rights (SDR) basket in October 2016.
Economic growth fell to 7.1% per year in 2012-2019 from 10.7% in 2002-2011. In 2020, the COVID-19 crisis demonstrated the Chinese economy’s strong capacity to absorb a major shock and rebound; real GDP returned to its pre-crisis level at the end of Q2 2020 and economic growth reached 2.3% in 2020 as a whole.
In the medium term, China’s structural slowdown is projected to continue. China continues a difficult economic transition: its investment/export-led growth model has reached its limits and far-reaching reforms are still needed to build a more balanced growth model that is more reliant on consumption and services, and less dependent on debt.