China’s GDP in the fourth quarter grows 6.5% year on year, exceeding expectations

(Reuters) – China’s economy grew at a faster-than-expected pace in the fourth quarter of last year, ending an extraordinarily good 2020 hit by the coronavirus, and has remained firmly poised to expand further this year.

Gross domestic product (GDP) increased 6.5% yoy in the fourth quarter, data from the National Bureau of Statistics showed Monday, faster than the 6.1% expected by economists in a Reuters poll, and followed a 4.9% growth in the third quarter.

MARKET REACTION

Asian equity markets reduced their initial losses and the main Chinese benchmarks, the Shanghai index and the CSI300 index, increased by 0.2% and 0.3%, respectively.

COMMENT:

TOMMY XIE, CHINA MAJOR RESEARCH MANAGER AT OCBC, SINGAPORE

“Very strong GDP growth, but domestic demand remains the weakest link. I imagine this production-induced recovery will continue in the first quarter of 2021.

“Since many migrant workers will not return to their hometown for CNY due to a resurgence of the virus, it is actually good for manufacturing.

“For monetary policy, it’s still pretty neutral. The PBOC is always a good trader to manage liquidity very well, hence probably the status quo for the first half. We will not see significant changes. “

CARLOS CASANOVA, SENIOR ECONOMIST, ASIA AT UNION BANCAIRE PRIVEE, HONG KONG

“The supply side of the recovery narrative continues to be very strong. And by that I mean all industrial production, all external demand, with that super good performance on the export front we saw last week translate into a rebound in industrial production in December, as well as with the data released this morning. But also on the domestic demand side of the equation… we saw this positive contribution in the fourth quarter as well. So both factors together led to this better result.

“I would say not to pay too much attention to the slight flex from November numbers. What is important in terms of Q4 is that the contribution was positive along with a stronger contribution from the supply side as well. So together these factors are what led to that improved fourth quarter performance.

“We don’t even see an immediate reversal of conditions in Q1. So, I think it will put upward pressure on our year-end forecast for 2021, by 8%. As a result, we are inclined to revise it up to 8.5% … Although we expect a shift in demand on the domestic front, the supply side will remain favorable, especially exports … (we) expect production industry should be able to remain stable around 7%. “

BO ZHUANG, CHINA HEAD ECONOMIST, TS LOMBARD, SINGAPORE

“Stronger than expected. I expected between 6% and 6.2%…. Exports have been really strong. I would argue this is more or less a production-driven recovery, and maybe you can even overdo it with over-productivity, overheating, due to the COVID-19 pandemic and blockages elsewhere.

“I think one of the main implications we have already seen is the total slowdown in credit growth … They are definitely spinning around, moving from credit expansion to slower credit growth “.

CHAOPING ZHU, JP MORGAN ASSET MANAGEMENT GLOBAL MARKET STRATEGISTER, SHANGHAI

“Internal economic activities are likely to improve in 2021 and provide further support from global recovery is expected. In particular, in the first quarter of 2021, we expect to see strong growth readings as growing pandemic control measures begin to take effect.

“Due to the recent resurgence of new COVID-19 cases, governments at various levels will ask people to reduce mobility and meetings during the Chinese New Year. The seasonality of Chinese exports and industrial production during the Chinese New Year may be disrupted and unusually high growth rates are likely to be seen this quarter.

“In terms of the policy response, the central bank and fiscal authority could return to a more neutral stance when the economy gets back on track. The PBOC can take a balanced and data-driven policy approach, emphasizing funding supports targeted to the real economy. However, when the housing market is heating up in tier one cities, general liquidity conditions could be tightened to curb potential asset bubbles. “

LOUIS KUIJS, HEAD OF ASIA ECONOMICS OF OXFORD ECONOMICS, HONG KONG

“Reflecting concerns about an early policy tightening, we expect macroeconomic policy to be conducted flexibly this year. However, given recent trends and our strong global growth prospects, we expect Chinese policymakers to be able to tighten policy this year, in line with the Central Economic Work Conference’s commitment to curb leverage and financial risks.

“With the change in the macro position, we see growth turning towards corporate consumption and investment, far away from infrastructure and real estate investments. And the sequential growth should soften. However, strong fourth quarter data calls for an upward revision of our growth forecast for 2021, from the current 8.1%.

“Following new government restrictions amid the COVID-19 outbreaks in two provinces, the reduction in confidence and travel during the Chinese New Year holidays in February could hamper first quarter growth. But, at least for now, we believe the risk of a major economic impact is low, given China’s track record in containing epidemics. “

WOEI CHEN HO, ECONOMIST, UOB, SINGAPORE

“We were looking at 6.1%. So, this is a very robust set of numbers.

“(However) the recovery in retail sales is below expectations, so I think there is a lot more to catch up to drive growth above 7%.

“The degree of private consumption recovery will be the key thing that will be important this year, especially as they started rolling out vaccinations in December. Hopefully, this will help bring out consumer demand in China.

“I think there will be a dissolving of the fiscal measures … (and) they won’t raise interest rates yet, but they will do open market operations to keep liquidity close at hand and I think it’s a way to reduce bond yields.” .

XING ZHAOPENG, ECONOMIST OF ANZ, SHANGHAI

“The higher-than-expected GDP number indicates that growth has entered an expansionary zone, although some sectors remain recovering.

“The exit from the policy will place counter-cyclical pressures on 2021 growth. Indeed, the fiscal withdrawal has begun due to no pre-approved plans for local government bonds this year.

“Monetary policy will maintain the necessary support for vulnerable sectors, but at the aggregate level the liquidity injection will return to normal.”

LI WEI, SENIOR CHINA ECONOMIST AT STANDARD CHARtered, SHANGHAI

“The data underpins a resumption of rapid but erratic growth, driven by increased exports of pandemic-related goods (medical equipment and electronics) and credit-fueled car and housing sales.

“However, the strong performance of recent months may be temporary, in our view, pandemic-related demand and credit growth should fade in 2021. As reflected in slow retail sales and slower-than-expected FAI growth, the domestic consumption of food, clothing, furniture and utilities remain below pre-pandemic levels, while the hospitality and transportation sectors continue to face capacity and travel constraints. “

BACKGROUND:

** The Chinese economy has surprised many with the speed of its recovery from Last year’s coronavirus shock, especially as politicians also had to address tense US-China relations on trade and other fronts: GDP shrank 6.8% in the first quarter for its first contraction since at least 1992 , when the official quarterly records began.

** It has since managed a notable rebound and at an accelerating pace, thanks in part to rigorous lockdown measures to contain the novel coronavirus, which first emerged in China in late 2019.

** Monday’s fourth quarter data confirming 2.3% growth for 2020 likely makes China the only major economy to have expanded last year. Government-led political stimuli and local producers stepping up production to supply goods to many countries paralyzed by the pandemic also helped ignite the momentum.

** China’s severe virus limitation has allowed it to largely contain the pandemic much faster than most countries, although a recent outbreak in the Northeast has caused the daily number of cases to rise to at most in over 10 months .

** While the initial economic rebound was driven by a resumption of factory activity and exports, with China’s share in world trade rising thanks to shipments up 3.6% last year, the Chinese consumer too has revived in recent months with a boost to the 2021 perspective.

** China still faces many challenges, not least the tensions between Beijing and Washington and how they would develop under the new US administration led by President-elect Joe Biden. Furthermore, rising labor costs, a shrinking population and a recent spike in credit defaults add to the risks for an economy that is still trying to reduce a mountain of debt.

** China’s economic growth is expected to accelerate to 8.4% in 2021 from 2.1% in 2020, before slowing to 5.5% in 2022, as the central bank is likely to keep interest rates constant, a Reuters poll showed.

** The People’s Bank of China has launched a series of measures since early 2020 to support the virus-affected economy, along with targeted support for small businesses and increased public spending on infrastructure.

Reporting from Asian offices; Compiled and published by Subhranshu Sahu