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Inside China 13 January 2021

Consumption set to lead the recovery charge

Jeremy Stevens

It is reasonable to assume that most macroeconomic data through much of H1:21 will be reporting record highs. Indeed, the Chinese economy seems set to rally, first from 7.0% y/y in Q4:20, then to a staggering 15.0% in Q1:21 — before slowing to 7% y/y in Q2:21, and to below 5% in H2:21. China’s economy is likely to expand by over 8% in 2021.

The relative outperformance of consumption and its record-breaking growth outcomes will shape the 2021 economic trajectory. We forecast 27% y/y expansion in retail sales in Q1:21, up from an already impressive 5% y/y expansion in Q4:20. This trend is in stark juxtaposition with many other engines of global consumption which remain low. It also contrasts with those components that had driven the recovery, which now face material headwinds, and will be softer than expected.

Progress in rebalancing China’s economy towards consumption will likely be due primarily to base effects rather than structural transformation. China’s reasonably sharp economic recovery to date, from April to September 2020, was driven primarily by traditional levers – most notably, of course, infrastructure and real estate investment. In 2021, household consumption, which had lagged the recovery, will expand faster than other components.

Still, sporadic Covid-19 cases now have evolved into a hotspot of a few hundred cases in Hebei Province. Dwarfed by international comparison, the pressure to contain and prevent its spread is nevertheless intensifying. Hebei’s capital, Shijiazhuang, is now under lockdown, and precautionary measures in Hebei and beyond have been ramped up in recent weeks. The Spring Festival travel and spending will be affected across China. Whilst the Covid-19 threat will continue this year, it is unlikely to affect individual risk attitudes as it is likely to directly impact only a negligible share of the population.

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