The article below is from our BRIEFINGS newsletter of 25 March 2021
More than one year into the pandemic and in the wake of the conclusion of China’s 14th National People’s Congress, investors are focusing on how the country will achieve its announced growth target of 6%. At a recent Goldman Sachs Asset Management Forum session, Prakriti Sofat, a portfolio manager who invests in emerging markets, explained the key economic drivers for China this year.
China just completed its Two Sessions, the country’s biggest political and economic gathering of the year, where the government said it would target growth of more than 6% in 2021. What is the significance of that target?
Prakriti Sofat: The 6% growth target is quite a low threshold given the median consensus forecast of about 8.5%. The government is using a conservative growth forecast primarily because of its focus on structural reform, innovation and the quality—rather than the quantity—of growth. The goal is to rotate the economy to be consumption-led, environmentally conscious and technology-oriented. During the Two Sessions, China also reiterated its commitment to reduce carbon emissions 18% by 2025 and achieve net zero emissions by 2060, which is significant given that China is the world’s largest coal consumer.
Given the increased focus on qualitative factors, how will government policy evolve in 2021?
Prakriti Sofat: We expect less policy support for a start. Policymakers in China are always balancing the tradeoff between using policy to increase economic growth versus maintaining financial stability and containing leverage. As leverage in the country’s economy has built up, the government started to shift its focus toward financial stability in the third quarter of last year. This year, policy normalization will entail a notable deceleration in credit growth, a smaller fiscal deficit, marginally tighter housing policies and stable monetary policy. This should help China stabilize the country’s debt-to-GDP ratio at just under 300%.
How would you characterize China’s economic growth last year?
Prakriti Sofat: China was “first in, first out” of COVID-19. The Chinese economy grew 2.3% in 2020, and its GDP closed the year 6% above the fourth quarter 2019 levels. In fact, China was one of the few economies whose GDP surpassed its pre-pandemic GDP levels in 2020. Solid export demand, industrial production, infrastructure investment and real estate activity all fueled growth last year, but consumption and services lagged.
What do you see as the economic drivers in 2021?
Prakriti Sofat: We expect manufacturing activity and increased household consumption will be the main drivers of economic growth this year. The manufacturing sector has faced many headwinds in recent years in part because of U.S.-China trade tensions, which created uncertainty for corporates, as well as a fall in domestic demand and investment in the sector last year. But there are a number of tailwinds for the sector in 2021. For one, Chinese exports actually accelerated in the first few months of 2021 at a time when we are seeing improved global growth outlooks, so the strong export demand is continuing to support investments in manufacturing. In addition, capacity utilization is rising, corporate profits are improving and there is demand to upgrade industrial equipment. On the consumption side, while retail sales are still lagging behind other sectors in the economy, we expect the rollout of the vaccine, employment gains, income growth, and, to some degree, an unwinding of excess savings will help normalize contact-based services, and related retail and consumption activity.
And how is 2021 shaping up so far?
Prakriti Sofat: Early 2021 activity data was mixed. Data from January and February showed a broad-based acceleration in exports across product types and destinations, and solid industrial production activity. However, retail sales growth was weak amid stringent restrictions to control a mild rise in COVID-19 cases. For example, hotel occupancy rates dropped from 60% in December to 20% but have started improving since late February. We’re keeping a close eye on manufacturing investment—which we expect to be a core driver of growth in 2021—as activity has weakened significantly in recent weeks. That said, the low base of 2020 should almost guarantee a significantly above-trend growth rate.