Emerging

The economic recovery is still mixed

rd  
Eco Emerging // 3 quarter 2021  
economic-research.bnpparibas.com  
3
CHINA  
THE ECONOMIC RECOVERY IS STILL MIXED  
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.  
Economic activity rebounded rapidly following the Covid-19 shock  
of early 2020, with real GDP returning to its pre-crisis level by the  
end of Q2 2020. The recovery reached a peak early this year, and real  
GDP growth rates should return to more normal levels in the quarters  
ahead. China’s economic rebound has also been characterised by very  
mixed performances between sectors and between demand compo-  
nents. These imbalances were still visible in Q2 2021. Consequent-  
ly, many corporates are still fragile , especially small enterprises in  
the services sector, and the labour market has not fully recovered yet,  
which in turn is hampering the recovery in household demand.  
FORECASTS  
2
019  
2020  
2021e  
2022e  
Real GDP growth (%)  
6.1  
2.3  
8.7  
5.3  
Inflation (CPI, year average, %)  
Official budget balance / GDP (%)  
Central government debt / GDP (%)  
Current account balance / GDP (%)  
Total external debt / GDP (%)  
Forex reserves (USD bn)  
2.9  
2.5  
1.7  
2.8  
-2.8  
17.0  
0.7  
-3.7  
20.6  
2.0  
-3.2  
22.0  
2.1  
-3.0  
23.4  
1.7  
14.5  
3 108  
15.0  
16.3  
3 217  
16.3  
15.1  
3 272  
15.2  
15.8  
3 312  
14.5  
MIXED PERFORMANCES  
Forex reserves, in months of imports  
Industrial activity rebounded rapidly in spring 2020, which enabled  
China to respond to the surge in world demand for manufactured goods  
and to win market share. Industrial production and export growth  
accelerated vigorously until early 2021. Since March, base effects have  
dissipated, growth rates have been normalizing, and supply shortages  
in some inputs have started to constrain activity. Industrial production  
growth averaged (a still robust) 9.3% year-on-year (y/y) in April-May,  
compared to 24.5% in Q1 2021. Industrial growth did not slow as much  
in value terms due to the acceleration in producer price inflation,  
which rose from 1.7% y/y in February to a record high of 9% in May.  
Meanwhile, merchandise exports increased by 30% y/y in April-May (in  
value terms), compared to 70% in Q1. Growth in the industrial sector  
and exports should continue to ease gradually in the months ahead.  
e: ESTIMATES & FORECASTS  
TABLE 1  
SOURCE: BNP PARIBAS GROUP ECONOMIC RESEARCH  
DIFFERENTIATED REBOUNDS  
y/y %, real terms  
5
3
3
2
2
1
1
Industrial production  
0
5
0
5
0
5
0
5
Production in services sector  
In the services sector, activity contracted just as much as it did in  
industry during the lockdown of January-February 2020, but the  
rebound started later and has been less vigorous. Even so, since March  
-
2
021, the growth rate in services production has surpassed that of  
-
-
10  
15  
industrial production (+15.4% y/y in April-May).  
Meanwhile, private consumption growth continues to recover, but it  
has slacked off in recent months. The performance of retail sales fell  
short of expectations in April-May, increasing by 13% y/y in volume  
terms (compared to 33.5% in Q1).  
2016  
2017  
2018  
2019  
2020  
2021  
SOURCE: NBS  
CHART 1  
Although official unemployment rates continue to decline (the urban  
unemployment rate based on surveys fell to 5% in May, the same level  
as in May 2019), the labour market has yet to return to its pre-crisis  
situation. Job insecurity and underemployment have increased; youth  
unemployment rates remain particularly high (13.8% in May 2021 vs.  
RISING INEQUALITIES WITHIN URBAN AREAS  
Changes in household savings illustrate how cautious individuals are.  
According to our estimates, the household savings rate increased from  
3
4.6% of disposable income in 2019 to 37.7% in 2020, and these extra  
1
2
0.5% in May 2019); and job creation has been less dynamic (in Q1  
021, job creations were 8% below the Q1 2019 level). All of this has  
savings have been only partially absorbed so far.  
Firstly, private consumption remains hampered by persisting health  
risks. Although the pandemic is largely under control in China, tempo-  
rary and localised restrictions on mobility are still regularly introduced  
in case of the emergence of new Covid-19 cases. This risk should di-  
minish with the ongoing acceleration of the vaccination campaign. On  
June 10th, 43% of the population had received at least one dose of the  
vaccine, and 16% were fully vaccinated (source: ourworldindata.org).  
constrained the rebound in household income. This is especially true  
for low-income households, the category that ran up the biggest losses  
during the lockdown and accumulated fewer savings in 2020.  
In urban areas, disposable income per capita declined by 2.2% in real  
terms for low-income households (after increasing 5.2% in 2019),  
whereas it rose by 2.3% for high-income households (compared to  
The bank  
for a changing  
world  
3rd quarter 2021  
economic-research.bnpparibas.com  
4
+
2
5.1% in 2019). Average real income of migrant workers stagnated in  
020. Rising inequalities and the difficulties of low-income households  
DECELERATION IN DOMESTIC CREDIT GROWTH  
are contributing to delaying the turnaround in private consumption.  
Meanwhile, income inequalities between urban and rural areas have  
narrowed during the health crisis. In 2020, average disposable income  
per capita increased by 1.2% in real terms in the cities and by 3.8% in  
rural areas. The ratio between the two has declined slowly for several  
years, reaching 2.6 in 2020, and fell further in Q1 2021.  
y/y %  
Total credits (social financing)  
Bank loans  
Shadow banking  
Bonds  
3
2
2
2
1
1
2
8
4
0
6
2
8
4
0
4
Consumer price inflation is still very mild and is unlikely to strain  
household spending, even though it has been accelerating over the  
past three months (to +1.3% in May from -0.2% y/y in February) after  
slowing throughout 2020 and early 2021. Food price inflation (+0.3%  
in May) is expected to remain low at least until fall, after flaring up in  
H2 2019 and H1 2020, and the increase in producer prices is having  
a limited impact on consumer prices. Core inflation has accelerated  
slightly (+0.9% in May), but remains lower than pre-crisis levels  
-
-8  
-12  
2
016  
2017  
2018  
2019  
2020  
2021  
SOURCE: PBOC  
(
it averaged 1.6% in 2019).  
CHART 2  
DOMESTIC INVESTMENT IS DICTATED BY ECONOMIC  
POLICY  
and domestic liquidity will be maintained at sufficient levels to  
After collapsing in Q1 2020 (-16% y/y in value), investment rebounded support manufacturing investment, boost the recovery of SMEs and  
rapidly and rose by 3% in full-year 2020. Investment growth hit record the services sector, and avoid aggravating credit risks. The absence  
highs in January-February 2021 (+35% y/y) due to large base effects, of strong inflationary tensions and appreciation pressure on the yuan  
but it has since fallen back rapidly (to +5% y/y in May). Last year, the should also provide incentives for the authorities to keep key interest  
rebound in investment was mainly driven by real estate and public rates unchanged.  
infrastructure projects, which were encouraged by policy stimulus  
On the fiscal policy front, priority will be given to adjusting the public  
measures. Therefore, the recent growth slowdown in investment in  
accounts while continuing to provide support to the most vulnerable  
both sectors was largely expected given the gradual tightening in  
enterprises. Fiscal deficits swelled considerably in 2020: while the  
domestic credit conditions since Q3 2020 and the moderation in public  
official” deficit only increased to 3.7% of GDP from 2.8% in 2019, the  
spending.  
consolidated deficit of the entire general government doubled last year.  
In contrast, manufacturing investment picked up later in 2020 and According to our estimates, it rose from RMB 4,600 bn in 2019, or 4.6%  
is expected to continue to recover in 2021. It should be stimulated of GDP, to RMB 9,200 bn in 2020, or 9% of GDP.  
by the strong momentum in exports and industrial activity, very high  
Moreover, total government debt is moderate (it rose from 17% of GDP  
industrial capacity utilisation rates, and the improvement in corporate  
at year-end 2019 to 21% at year-end 2020 for the central government,  
profits. Despite a rather disappointing performance recently, we still  
and from 21.6% to 25.3% for local governments), but the debt load is  
expect manufacturing investment to strengthen in the short term.  
unequally distributed. Above all, local governments are exposed to high  
contingent risks associated with the debt of their financing vehicles  
INCREASINGLY CAUTIOUS WITHDRAWAL OF SUPPORT and other enterprises they own (according to the IMF estimates, the  
debt of financing vehicles was 38% of GDP at year-end 2020).  
MEASURES  
Signalling a cautious policy tightening move, the official deficit target  
The authorities have shifted their priorities in recent months. Given for 2021 was lowered to 3.2% of GDP and the consolidated deficit of the  
the economy’s strong performance after the Covid-19 shock, support entire general government should decline slightly to 7.5%. Deferrals/  
measures have been withdrawn gradually. However, the authorities exemptions from taxes and social security contributions are unwound  
also admit that the economic recovery’s foundations have remained gradually, except for small enterprises. Public spending is moderated,  
unstable”, so they will probably be increasingly cautious when in particular with a sharp slowdown in infrastructure investment  
growth – which contributes to both fiscal adjustment and domestic  
debt reduction efforts. As a matter of fact, new bond issues by local  
governments to finance infrastructure projects were cut back sharply  
in the first months of 2021.  
tightening economic policy.  
Regarding monetary and credit conditions, the top priority is to slow  
debt growth and to combat financial-instability risks, primarily through  
prudential measures. Growth in total credit (social financing) slowed  
from 13.7% y/y in October 2020 to 11% in May 2021, driven by a slight  
decline in bank loan growth (60% of the total), a sharp slowdown  
in bond financing growth and the continued contraction in shadow  
banking credit. Total credit growth should continue to slow in the short  
term. In particular, property policy could be tightened further (with  
stricter rules for transactions, financing of developers or mortgage  
loans). At the same time, key policy rates are expected to stay stable,  
Completed on 29 June 2021  
Christine Peltier  
christine.peltier@bnpparibas.com  
The bank  
for a changing  
world  
QUI SOMMES-NOUS ? Trois équipes d'économistes (économies OCDE, économies émergentes et risque pays, économie bancaire) forment la Direction des Etudes Economiques de BNP Paribas.
Ce site présente leurs analyses.
Le site contient 1589 articles et 282 vidéos