Outlook for China’s economy

Post-pandemic outlook

Commerzbank forecasts China’s economy to grow 8% in 2021, despite headwinds from the COVID-19 pandemic and uncertainties surrounding the global demand. The Chinese authorities set a growth target at “above 6%” for 2021*, which looks attainable given the low base last year. In the meantime, the job market has become more critical as it matters for domestic demand.

In the meantime, it will be relieved to see that its domestic manufacturing industry has remained resilient, with production already returning to pre-pandemic levels**.

At the press event, Hao commented on China’s housing market which had also performed strongly for the majority of 2020***, reflecting a V-shaped recovery, but policy makers may look to curb fund flows into the sector amid a high concentration of debt.

Hao said: “Leverage remains a constraint. Policy makers will be paying close attention to debt levels as we see further normalisation of China’s monetary policy. Credit risks could emerge for some sectors during this process, with the potential for credit events or defaults.”

A more self-sufficient model

China’s dual Circulation Strategy will continue to emphasise the development of its domestic market, aiming to increase its sustainability and self-sufficiency while reducing the country’s dependency on foreign trade. Despite this, Hao expects China to continue to diversify its international trade, particularly with the signing of the Regional Comprehensive Economic Partnership (RCEP) mega deal last year with 14 neighbouring markets, such as ASEAN, Japan, South Korea and Australia, which will cover about 30% of global trade.

China-US relations

In terms of nominal GDP, Commerzbank forecasts the size of China’s economy to continue the “catch up” progress with the US economy, based on current economic growth trends. While the Biden Administration has declared China as a strategic competitor, China has commented that it wants to rebuild goodwill with the US and called for the US to remove its tariffs on China. Hao expects this process to be long and complicated, but for Biden’s policy to be more predictable than with the previous US administration. Hao added: “In general, the US-China dynamic will need to be monitored, as it will be a long and complicated process to resolve. From a global markets perspective, uncertainties will remain which will no doubt lead to some markets volatilities.”

Currency focus

Hao Zhou concluded that, the Chinese Yuan (CNY) has been performing well since Q3 2020 and is expected to remain stable in H1 2021. However, the CNY exchange rate is likely to weaken in H2 2021 due to a narrowing yield differential, as well as a strong economic momentum in the US. The softening of CNY is also a result of the likely re-emergence of US-China tensions under the Biden administration. For corporates, it is always important to engage into a hedging instrument to manage the FX risk.

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* according to China’s National People’s Congress

** according to Commerzbank Research

*** according to Commerzbank Research