Economic growth in China

At a recent virtual media roundtable, Hao Zhou, Senior Emerging Markets Economist Asia, shared his outlook on China’s economy for the second half of 2021.

Commerzbank expects China’s GDP growth to moderate in the second half of 2021 as the recovery momentum slows and the economy begins to normalize. For the whole year of 2021, Chinese economy is expected to expand by 8.4%. While the pace of growth seems to have declined significantly, the record GDP figure of 18.3% YoY growth in the first quarter of 2021 was boosted by a low base in 2020 caused by the pandemic.

Hao Zhou, Senior Emerging Markets Economist

Consumption in China continues to stage a recovery

While consumption continues to stage a recovery, growth momentum is not as strong as initially predicted. Consumer Price Inflation (CPI) remains lukewarm, signaling subdued consumption. Retail sales are lagging their long-term trend this year, while automobile sales have returned to pre-pandemic levels. The housing sector may lose steam this year, despite strong sales figure in 1H-21, as the government begins to implement restrictive measures for the property market, including a price cap on new apartments

Weaker profits in China’s industrial sector

Meanwhile, China’s industrial sector is likely to see weaker profits this year, due to higher prices for inputs and intermediate goods. Hao expects PPI to peak in June or July and stay around the 8-9% mark for the next two or three quarters.

Normalizing Monetary Policy

The central bank is likely to continue normalizing its credit and monetary policies to ensure that the debt-to-GDP ratio will not pick up in the foreseeable future. Leverage remains a constraint for China, with increasing household, government, and non-financial debts since the start of the crisis. The PBOC is already acting by slowing down the pace of credit expansion, resulting in a marked decline in the growth of aggregate financing this year.

Depreciating Chinese Yuan

A “managed currency” remains the key regime for CNY. The currency is likely to edge lower in the second half of 2021, as the pace of growth in China slows and the US recovery gains traction. Commerzbank estimates the USD-CNY pair will reach 6.6 by the end of this year.

Domestic Reliance & Self-Sufficiency

The dual-circulation strategy will also continue to be a key theme in China as the country focuses on growing and strengthening its domestic market in the next couple of years. This self-sufficient model has already decreased China’s external dependency, with foreign-trades-to-GDP ratio falling to a decades-low recently. However, Commerzbank believes China will continue to foster close relationships with critical trade partners such as the Regional Comprehensive Economic Partnership (RCEP) as its domestic market alone will not be sufficient to drive economic growth.