KPMG forecasts Top 10 Macroeconomic Trends in China in 2021

KPMG forecasts Top 10 Macroeconomic Trends in China...


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As KPMG China’s recently released 10 Macroeconomic Trends in 2021 outlook report highlights, the COVID-19 pandemic is undoubtedly a “black swan” that has significantly affected the global economy in 2020. Kevin Kang, Chief Economist of KPMG China, says: “As 2020 draws to a close, there are many ways to review China’s economic performance, but two ‘upside surprises’ in exports and foreign direct investment (FDI) have provided an interesting angle for looking at the country’s economic development in the past year.”

The first upside surprise is that China’s exports increased 2.4% year-on-year (YoY) in the first 10 months of 2020. By contrast, global trade decreased by 14% YoY in the first half of 2020, and the World Trade Organization expects it to decline by 9.2% for the full year. Based on these data, we estimate that China’s share of global exports increased by 2.7% from the end of 2019 and reached 16.7%. The second upside surprise relates to FDI. At the beginning of the year when the COVID-19 outbreak had just started, there was a widespread concern across sectors that foreign investment might leave China. Policies issued by some countries to support reshoring further accentuated this concern. However, in reality, FDI in China has remained resilient. In fact, FDI grew 6.4% between January and October compared to the same period last year and has even seen double-digit growth rates in recent months. By a clear contrast, global FDI decreased by 49% in the first half of 2020, and the United Nations Conference on Trade and Development (UNCTAD) forecasts global FDI to fall 30%-40% this year.

The reasons behind the two upside surprises are similar. Thanks to its effective measures to control the spread of the pandemic, China was the first in the world to restart its economy. However, many other countries are still trying to fully contain the pandemic, which has held their production capabilities back. At the same time, many advanced economies have introduced massive fiscal and monetary stimulus to stabilise economic growth. With consumption demand remained relatively strong but production lacking, the gap between their demand and supply has made those markets more reliant on China’s production, investment and export.

Against this background, we anticipate 10 macroeconomic trends in China next year:

  1. The consumption and service sectors will continue to improve and become the main driver for China’s economic recovery: China’s economic recovery is gradually shifting from being corporate-driven to household-driven. Continuous economic recovery will drive stronger consumer confidence. Also, the normalisation of pandemic containment measures will release offline consumption power and support the recovery of the consumption and service sectors. This will be the key growth driver in the next stage of economic recovery.

  2. Growth in manufacturing investment will accelerate further: Industrial profits have experienced strong growth, and corporates have started to build up inventory. The manufacturing purchasing managers’ index (PMI) has remained in the expansionary range, indicating a growth trend. We believe that manufacturing investment, especially in high-tech manufacturing with the support of industrial upgrading, will continue to grow rapidly and become the major driver of investment next year.

  3. Exports will remain robust, with the overall growth rate staying high in 1H and moderate in 2H: As the pandemic is still spreading around the world, the gap between production and demand in many overseas markets is expected to remain in the near future, which should continue to benefit China's export sector. As the global economy gradually normalises with the roll-out of vaccines, orders for medical supplies and substitution exports will decline. The high figures in 2020 will also make the year-on-year comparison less favourable, causing export growth to slow down in the second half of 2021.

  4. Fiscal and monetary stimulus will be gradually dialled back, but the pace of policy adjustment should be watched closely: We expect that with the continued economic recovery, China’s fiscal and monetary policies will be gradually normalised. We expect the deficit ratio to be dialled back to around 3% in 2021, and the growth of the money supply (M2) and total social financing in 2021 will be basically in line with nominal GDP growth. However, policy support measures should remain flexible and not be withdrawn too early or too quickly. Companies should pay close attention to the speed and pace of policy normalisation and make business plans accordingly.

  5. China will remain attractive to foreign investment, and supply chain resilience will become an important consideration: A huge and rapidly growing domestic market, broad industrial base, high-quality infrastructure, and continuous opening-up policies all make China an attractive destination for foreign investment and a high priority for multinational corporations. Enterprises have had to rethink the importance of security and stability throughout the supply chain in view of the COVID-19 outbreak. As a result, supply chain resilience has become an important dimension when companies evaluate their global production strategies and make necessary adjustments.

  6. Foreign holdings of RMB financial assets will rise further, and the RMB exchange rate is expected to stay relatively strong: China will continue to promote the opening-up of the financial sector and facilitate foreign investment in RMB financial assets in 2021. We expect the RMB exchange rate to remain stable with some modest appreciation pressure.

  7. The global economy will continue to recover, but it will still be influenced by pandemic control and vaccine roll-outs: We found a strong positive correlation between countries that have better control over the pandemic and stronger economic recoveries. COVID-19 vaccine development has made significant progress recently. With new progress in vaccine development, key global economies are expected to relax pandemic control measures to drive economic recovery in the first half of next year. It is worth noting that the production, distribution and administration of vaccines will still take time, and globally coordinated efforts are needed to fight this global pandemic.

  8. US-China trade frictions may ease temporarily with the new US administration: The dust should settle from the 2020 US presidential election. The Biden administration may likely revert to a more traditional foreign policy structure and rely on multilateral approaches and existing international organisations. We expect that dialogue between the US and China may increase somewhat in 2021, which would help reduce uncertainty. However, it will still be difficult for the US-China relationship to see substantial improvement soon, and our baseline scenario is that the status quo will be maintained in the near term. Tariffs and other restrictive measures that were imposed earlier may be difficult to remove quickly.

  9. Asia Pacific economic integration will be further strengthened: Recently, 15 economies in the Asia Pacific region signed the Regional Comprehensive Economic Partnership (RCEP). The agreement should further strengthen economic collaboration in the region using various measures. It should also allow more flexibility and collaboration for supply chain deployment in the region. It is true that economic levels, government structures, and cultures across the 15 member countries vary substantially, and there is still a long road before RCEP’s benefits are fully realised. In the future, the global economy may form three hubs comprising the Asia Pacific, North America, and the European Union.

  10. Innovation, security and green development are expected to be the key policy focuses: 2021 marks the beginning of the 14th Five-Year Plan (FYP). We believe there are three keywords that deserve close attention: Innovation, Security, and Green Development. Indigenous innovation, especially in core technology areas, is considered fundamental to China’s future growth. National security has also received special attention under the 14th FYP, and it calls for implementing a holistic national security strategy. The 14th FYP should have an impact on many areas of the economy, such as industry structures, infrastructure, natural resources, technology, finance, and ecosystems. In the area of green development, China has set a goal to reach peak carbon emissions by 2030 and realise carbon neutrality by 2060. This presents expanding opportunities in areas such as new energy vehicles, environmental conservation and restoration, smart grid development, and resource recycling.

Kang concludes: “The 14th Five-Year Plan for 2021-25 carries particular importance, as it will be the first five-year plan after China has attained its first centennial goal of ‘building a moderately prosperous society in all respects’ and started driving towards its second centennial goal. Against this background, we expect China’s economy to continue to recover and its GDP growth to reach 8.8% in 2021.”



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