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22 Mar 2021

International Economy

China’s Economy May Grow More Slowly than Prior Estimate Due to Its Cautious Fiscal and Monetary Stances, Plus Sluggish Domestic Consumption (Business Brief No.3915)


In the government policy statement reported at the National People's Congress held in early March 2021, China's Premier, Li Keqiang, announced that China would target an economic growth of more than 6 percent p.a. in 2021. KResearch is of the view that the setting of such a relatively low economic growth target is symbolic to reflect the government's initial step in adjusting the country's paradigm towards quality and sustainable growth. KResearch, however, maintains our growth forecast for the Chinese economy at 8.0-8.5 percent for 2021, though its economic growth may lean towards the lower end of our forecast range at 8.0 percent due to a number of factors, as follows:

  • China's monetary and fiscal normalization has taken place faster than expected

    China has implemented a relatively cautious fiscal policy by setting a lower fiscal deficit and quota for the issuance of local government special-purposed bonds as compared to last year.  Additionally, the implementation of its monetary policy is intended to maintain financial stability rather than stimulating the economy. At the recent National People's Congress, the government did not set a specific growth target for broad money supply or M2, but only that the target may be raised or lowered, depending on economic performance. This differs from last year when the M2 growth target was explicitly determined at more than 8.7 percent YoY. Moreover, the Chinese government did not announce the use of unconventional monetary policy as seen in the previous year either.              
  • Although the Chinese government attaches importance to stability in the labor market to ensure solid internal circulation, consumers have begun to cut spending due to concern about employment.

    China gives importance to the labor market as it reflects on its economic and social stability overall. It also focuses on strengthening internal circulation, as evidenced by the government's higher growth targets for new urban employment at 11 million jobs in 2021 (an increase from the 9 million jobs in 2020) and the surveyed unemployment rate at 5.5 percent. Although China added a total of 1.48 million jobs and the unemployment rate was within the set target of 5.5 percent during January-February 2021, consumer confidence in terms of spending and employment began to subside since late 2020. Additionally, despite a 33.8 percent YoY jump in retail sales during 2020, it only grew 5.56 percent YoY when compared to the 7.2-9.8 percent growth recorded in 2019. Sales of durable goods have declined, such as cars, which fell to 1.45 million units in February 2021, which is the lowest since March 2020, reflecting the sluggishness in domestic consumption. However, risks stemming from the faster-than-expected withdrawal of economic stimulus measures while consumer confidence has yet to return to normalcy may stall the domestic economy. This issue warrants close monitoring ahead.
  • The manufacturing and export sectors continue to thrive, but they have shown signs of slowing down.

    Although China's manufacturing sector picked up during January-February 2021, as reflected in a 35.1 percent YoY increase in the Industrial Production Index and 60.6 percent jump in exports, it has begun to slow down as evidenced by a decline in the China Manufacturing PMI to 50.9 in February 2021, from the 51.5 reported for January, suggesting slower growth in the Chinese manufacturing sector. Chinese exports also plunged from its record high in 2020.

Given this, KResearch has decided to maintain our 2021 economic growth forecast for the Chinese economy at 8.0-8.5 percent. However, growth may lean towards the lower end of the projection band at 8.0 percent because China is set to normalize its monetary and fiscal policies sooner than expected. Moreover, rather using economic stimulus measures via infrastructure project investment, which only allows the government to inject liquidity into the economic system over the short term, China will place emphasis on investment in basic research to achieve sustainable growth over the long term. Additionally, sluggishness is seen in China's domestic consumption, manufacturing sector and exports while there is risk of a new wave of COVID-19 due to the delayed vaccine rollout. ​

International Economy