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CHINA ECONOMIC WATCH
Biweekly Research Report 14th May 2021
China’s Post-Pandemic Economic Model
Authors:
Dr. Gerard Lyons
Dr. Lu Li 李璐
London Research Centre
[email protected]
Chang Liu 刘畅,CFA
London Trading Centre
[email protected]
Approved by:
Dr. Kang Qu 瞿亢
London Research Centre
[email protected]
Recently Released Economic Indicators
Key Theme
Recently Released Economic Indicators
China’s post-pandemic economic model, dual circulation, is a
strategy that looks set to deliver solid, sustained growth, but with
several areas that merit particular attention. The success of dual
circulation is also critical to the 2035 goal of delivering technology
advances and doubling income per head.
China’s PMIs suggested that growth remains moderate for now and
pointed to growth having been more balanced recently, with services
continuing to catch up to industry and construction after a period of
underperformance.
China’s trade data for April showed that shipments remained
buoyant, with both export and import growth surging last month.
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Dear reader,
A warm welcome to our biweekly publication,
China Economic Watch, that is being made
available publicly for the first time.
The aim is to help keep you informed fully
about latest developments in the Chinese
economy.
Each edition will contain a focus piece on a key
topic, plus a round-up of latest economic data.
We hope that you find it informative and useful.
KEY THEME China’s Post-Pandemic Economic Model
By Gerard Lyons*
China’s economy has rebounded strongly from
the pandemic. As the year progresses, a prudent
monetary policy aimed at curbing the expansion
of credit and keeping inflation in check may slow
overall growth to a more sustainable pace. Despite
this, 2021’s growth should still meet the official
target of more than 6%, following last year’s 2.3%.
Attention this year, however, should focus not just
on China’s growth rate but on its new growth
model of dual circulation that was unveiled last
year.
China has no shortage of ambitious aims. Dual
circulation sits alongside the 14th Five Year Plan,
unveiled in March, that will drive immediate
economic policy. The success of dual circulation
is also critical to the 2035 goal of delivering
technology advances and doubling income per
head.
What does dual circulation mean, and what should
we make of it?
Dual circulation is a policy of two parts: domestic
and international. Domestic circulation is aimed
at transforming and growing China’s economy.
The international component, meanwhile, appears
less about boosting China’s global role and more
about how, through external resources, it can
support its domestic economic aim to boost living
standards and create jobs.
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This is a good time for China to unveil a new
economic strategy. As China’s population ages,
its trend rate of economic growth is expected to
slow.
Also, rising geopolitical tensions and the legacy
of the pandemic points to a more difficult and
uncertain international environment. Trade
tensions have been evident in recent years. While
in areas of mutual benefit such as addressing
climate change, China will play a key role and
international cooperation is inevitable, the US and
UK look set to adopt a more robust relationship
with China in defence, security and areas linked
to human rights. Bilateral business and financial
ties will have to develop within this new context.
Thus, dual circulation is viewed by some as a
more inward-looking growth model. It certainly
should make China more self-sufficient and
resilient to external shocks. But it may be wrong
to suggest the external dimension is any less
important, given China’s focus on the Belt Road
initiative and its decision to join RCEP, an Asian
regional trading bloc, last year.
China, too, is not immune to the same policy
challenges facing all major economies, of high
public debt and exceptionally low interest rates.
By necessity, this reinforces the need for China to
move away from debt-fuelled growth and aim to
move up the value-curve in the face of future
intense competition and the growth of artificial
intelligence.
The issue is whether dual circulation can deliver
China’s new pro-growth agenda?
A decade ago, attention was on the need for China
to overcome the Middle Income Trap where many
countries find it difficult to move from middle
income to high income. This is not mentioned
now, as China’s middle class continues to swell,
as income standards rise.
Yet, the concerns that underpinned it are reflected
in the need for China to move from an economy
with an over-reliance on exports and investment
to one where it sees higher domestic consumption.
The share of domestic consumption is still low.
In my view, this policy is likely to succeed, but
there are six areas that merit particular attention.
One, success depends upon a stronger role for the
private sector. China cannot run its economy in
the future in the same way that it has run it in the
past, given its increasing size and scale. There will
be a need for the market mechanism to play a
bigger role, including deeper and broader capital
markets and deeper and broader insurance
markets. In the latter, China may provide a role
model in terms of pension provision for its middle
classes.
In March 2020, the Central Committee said that
the market needs to play a more important role in
the allocation of land, labour, capital and
technology. Then in May, they stated that there is
a need to minimise government intervention in
micromanagement of the economy. I agree.
The implication of this is probably the most
important one for China, namely that while the
direction of its economy is clearly upwards, one
should expect increased volatility along that
upward trend.
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Two, infrastructure is critical for success. Hard
infrastructure is an important part of dual
circulation, with increased transport and
broadband connectivity. So too is soft
infrastructure, covering skills and training. There
is also the need to not lose sight of institutional
infrastructure, as divergences at a regional level
point to greater devolution of policy. This is a
challenge anywhere, but perhaps more so in China
given its scale.
Three, there is a need to ensure compatibility
between domestic and international circulation,
whereby the higher wages that would flow from a
successful domestic policy do not undermine
competitiveness. To address this, improving the
supply side of the economy needs to go hand in
hand with boosting domestic demand.
Boosting domestic demand needs: improving the
social safety net, higher wages, generating jobs,
and ensuring a successful social welfare model,
perhaps using the dividends from successful state-
owned enterprises to fund this. On the supply side,
reform is key to future success, including boosting
research and development and raising
productivity.
Four, resilience will be a feature in a post-Covid
world. China is heavily dependent upon imports
in some important strategic sectors such as
technology, energy and food. This sits alongside
other policy aims, such as ‘Made in China 2025’,
where China wants to shift from low to high end
manufacturing focused on robotics, information
technology and clean energy. Indeed, China’s
target to achieve net zero carbon emissions by
2060 points to it working with others, like the UK,
on the green agenda, as we are likely to see this
year.
Five, the importance of a level playing field.
Import substitution is not always possible, nor is
it the best solution. China needs to support the
multilateral trading system, as it makes sense for
itself and the global economy. In doing so it
would overcome fears in some circles that there is
not a level playing field for foreign firms looking
to sell into China.
Six, one size does not fit all. Different regions of
China will grow at different speeds. In my view,
there is a strong case to use the Greater Bay Area
as a pilot for the success of dual circulation, This
Area is likely to be one of the most dynamic parts
of the world economy in coming decades and it
includes nine cities in Guangdong Province, plus
Macau and Hong Kong. This points to a vibrant
world class cluster and to an innovative
technology hub with global influence, plus Hong
Kong’s importance as a financial centre.
China’s new growth model has been unveiled at
an appropriate time, given the changing domestic
and international environment. Dual circulation is
likely to evolve. As I have outlined here, there are
a number of areas that merit attention as it is a
policy that looks set to deliver solid, sustained
growth.
* Dr Gerard Lyons is an international economist based in London. He is
an independent, non-executive director of Bank of China (UK)
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RECENTLY RELEASED ECONOMIC
INDICATORS
PMIs Consistent with Slight Slowdown in
Growth
The latest PMI surveys offered diverging
messages about manufacturing conditions in
April, with the official survey pointing to a slight
slowdown in growth but the Caixin index pointing
to an improvement in conditions. However, with
the official non-manufacturing survey revealing a
slowdown in the broader economy too, overall
activity likely slowed slightly last month. This is
consistent with the picture painted by the high-
frequency data in recent weeks.
Specifically, the official manufacturing PMI
declined to 51.1 last month from 51.9 in March, a
three-month low. But the Caixin index instead
rose to 51.9 from 50.6, hitting a four-month high
(Chart 1).
Chart 1: China Manufacturing PMI
Sources: WIND, Bank of China
The breakdown of the surveys also diverged
across most components, with the Caixin index
showing pick-ups in production, new orders and
employment but the official survey pointing to
declines in all three areas.
One area where the two surveys were in partial
agreement was on price pressures. The breakdown
of the Caixin index showed signs of the economy
hitting capacity constraints and price pressure
starting to build, with the input price component
of the survey rising to the highest since 2017.
While the price components of the officials survey
edged down last month, these also remained near
cycle highs, consistent with a further rise in prices.
Beyond the manufacturing sector, growth in
the rest of the economy appears to have slowed
in April. The official non-manufacturing PMI fell
last month to 54.9 from 56.3 in the previous
month, though this is still the second-highest
outcome this year (Chart 2).
Chart 2: China Official Non-Manufacturing PMI
Sources: WIND, Bank of China
The decline was driven in large part by weaker
conditions in the construction sector: the
construction PMI fell sharply to 57.4 last month
from 62.3 in March, corroborating the recent high
frequency data in showing that building activity
has slowed noticeably in recent weeks. The
decline in the services PMI appears mild at first
glance, with the headline index falling only to
34
36
38
40
42
44
46
48
50
52
54
56
34
36
38
40
42
44
46
48
50
52
54
56
2014 2015 2016 2017 2018 2019 2020 2021
Caixin/MarkitOfficial
25
30
35
40
45
50
55
60
65
25
30
35
40
45
50
55
60
65
2014 2015 2016 2017 2018 2019 2020 2021
HeadlineServicesConstruction
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54.4 from 55.2. However, the resilience in the
headline reading was mainly due to strong
sentiment, with firms’ expectations of future
activity only edging down slightly last month.
Underlying demand weakened more noticeably,
with the new orders and employment sub-
components both seeing sharper falls (Chart 3).
Chart 3: Official Services PMI Breakdown
Sources: WIND, Bank of China
The decline in the services PMI appears mild at
first glance, with the headline index falling only
to 54.4 from 55.2. However, the resilience in the
headline reading was mainly due to strong
sentiment, with firms’ expectations of future
activity only edging down slightly last month.
Underlying demand weakened more noticeably,
with the new orders and employment sub-
components both seeing sharper falls.
Taking a step back though, despite signs of a
slowdown, economic growth remains moderate
for now and is continuing to push the economy
towards capacity constraints. While policy
headwinds are likely to drag growth gradually
lower in coming months (particularly in the
second half of this year) price pressures are likely
to rise fairly sharply in the near term, which will
probably be reflected in a further rise in producer
price inflation. However, if we are right about a
slowdown in demand later this year, any pick-up
in inflation should prove transitory. This points to
the PBOC keeping policy rates and reserve
requirement ratios unchanged this year.
Robust Demand Props Up Trade Data
China's export data beat market expectations
again last month, with export growth rebounding
after a slight slowdown in March. Import growth
surged in April, hitting its highest rate of annual
increase since 2010.
Specifically, growth in exports rose to 32.3% y/y
in US dollar terms in April from 30.6% in March,
the second-fastest pace since 2018. Growth in
imports jumped to 43.1% y/y last month from
38.1% (Chart 4).
Chart 4: China Trade (Jan. and Feb Averaged, % y/y)
Sources: WIND, Bank of China
Of course, the recent moves in y/y export growth
is due in large part to the weak base from a year
ago, when COVID-19 disruptions led a sharp fall
in activity. However, even in m/m terms,
exports were strong last month, rising by 9.4%
in April.
25
30
35
40
45
50
55
60
65
25
30
35
40
45
50
55
60
65
13 14 15 16 17 18 19 20 21
Expected operation activityNew ordersEmployment
-30
-20
-10
0
10
20
30
40
50
60
70
-30
-20
-10
0
10
20
30
40
50
60
70
2016 2017 2018 2019 2020 2021
Exports
Imports
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Turning back to the detailed y/y data. The
breakdown of the figures by geography showed
that shipments to the US weakened slightly while
those to the rest of the world picked up. This may
be an early sign that consumption in the US is now
shifting back towards services from goods as
lockdown measures are being eased.
Turning back to the detailed y/y data. The
breakdown of the figures by geography showed
that shipments to the US weakened slightly while
those to the rest of the world picked up. This may
be an early sign that consumption in the US is now
shifting back towards services from goods as
lockdown measures are being eased.
That said, the product breakdown showed that
global demand for many manufactured goods
remained robust for now, with shipments of toys,
garments and LCD displays all holding up well.
Exports of medical equipment, a major prop to
exports last year, continued to slow.
On the imports side, the jump in growth last
month was again in large part due to price
effects as commodity price inflation continued
to rise. But while commodity imports
(particularly oil) were a major driver of the recent
strength in imports, inbound shipments of other
products, including vehicle parts, also accelerated
markedly in April, pointing to solid domestic
demand.
Looking ahead, we expect imports to continue
to outperform exports in the near term. Export
growth is probably close to a peak and should start
to slow gradually in the months ahead as base
effects become less flattering and global
consumption shifts towards services and away
from goods following a ramping up of vaccine
roll-outs. In fact, the latest exports orders data are
consistent with a further slowdown in outbound
shipments in the next few months. By contrast,
imports should continue to benefit from elevated
commodity price inflation and a further recovery
in consumer demand in the next few months
underpinned by stronger labour market conditions,
though headwinds from a withdrawal of policy
support is likely to constrain the scale of the
recovery further ahead.
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LATEST PEOPLE’S BANK OF CHINA
ACTION
China’s Fintech Sector to Face Rising
Oversight
Recently China’s top financial regulators,
including The People’s Bank of China (PBOC),
the China Banking and Insurance Regulatory
Commission, the China Securities Regulatory
Commission, and the State Administration of
Foreign Exchange, had a meeting with 13 of the
country’s biggest tech firms that offer online
financial businesses and warned over unfair
market practices. Firms required to attend
included Tencent, ByteDance and JD.com.
While praising the efficiency and inclusiveness of
the online financial platform in recent years, a
statement released by the PBOC pointed out
several widespread issues, including offering
banking and other financial services without a
license, inadequate corporate governance and
engaging in anti-competitive practices.
All 13 companies have been asked to conduct
comprehensive self-examination and rectification
of their businesses based on the following
requirements. First, all financial activities must be
licensed to operate. Second, the improper links
between payment tools and other financial
services must be disconnected and transaction
transparency needs to be improved. Third,
companies must have licenses to conduct personal
credit reporting. Fourth, regulators called for
strengthening shareholder qualifications, equity
structure, capital. Fifth, the firms need to improve
corporate governance and financial risk
management when making online loans and
investments. Sixth, the issuance and transaction of
asset securitization products and the act of listing
abroad need to be standardized. Seventh, officials
demanded to strengthen the financial consumer
protection mechanism by regulating the collection
and use of personal information and other
measures.
PBOC to Build up Its Fintech Cloud
Infrastructure
China’s central bank will accelerate the
development of its own fintech infrastructure,
which includes upgrading its data centres and
networks to link all central bank offices and
branches, along with building a "central bank
cloud" in 2021 to keep pace with the financial
industry that is increasingly being shaped by data
and artificial intelligence.
Last year, the PBOC registered two new fintech
companies. In July, it created a company called
Chengfang Fintech with 2 billion yuan (US$307
million) in registered capital. Then in October, it
founded Chengfang Financial Information
Technology, with 1.5 billion yuan in registered
capital.
The statement of building its’ own fintech cloud
infrastructure is another step in its strategy to
build a digital central bank, reflecting the
commitment to pushing ahead with its digital
transformation strategy.
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KEY FIGURES AND TABLES
Sources: WIND, Bank of China
Global Commodity Prices and China
PPI (% Y/Y) Number of COVID Vaccinations
Per 100 People
Trade by Region
(Jan. & Feb. Ave., % y/y)
China’s Green Loans
11
14
17
20
6
8
10
12
2018-12 2019-06 2019-12 2020-06
Total balance of green loans (RMBtn, LHS)
Green loans growth (% y/y, RHS)
Other loans growth (% y/y, RHS)
-30
0
30
60
90
-30
0
30
60
90
2016 2017 2018 2019 2020 2021
Exports to the US
Exports to the Rest of the World
0
10
20
30
40
50
60
70
80
90
0
10
20
30
40
50
60
70
80
90
2021-01 2021-02 2021-03 2021-04
China
UK
US
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KEY ECONOMIC INDICATORS
Industry sector 2020 2021
Apr. May Jun. Jul. Aug. Sep. Oct. Nov. Dec. Jan. Feb. Mar. Apr.
GDP (%, y/y) - - 3.2 - - 4.9 - - 6.5 - - 18.3
CPI (%, y/y) 3.3 2.4 2.5 2.7 2.4 1.7 0.5 -0.5 0.2 -0.3 -0.2 0.4 0.9
PPI (%, y/y) -3.1 -3.7 -3.0 -2.4 -2.0 -2.1 -2.1
-1.5 -0.4 0.3 1.7 4.4 6.8
Surveyed Jobless Rate 6.0 5.9 5.7 5.7 5.6 5.4 5.3
5.2 5.2 - 5.5 5.3
Fixed Assets Investment
(YTD, y/y) -10.3 -6.3 -3.1 -1.6 -0.3 0.8 1.8 2.6 2.9 - 35 25.6
Industrial Production
(y/y) 3.9 4.4 4.8 4.8 5.6 6.9 6.9 7.0 7.3 - 35.1 14.1
Retail sales (y/y) -7.5 -2.8 -1.8 -1.1 0.5 3.3 4.3 5.0 4.6 - 33.8 34.2
Manufacturing PMI 50.8 50.6 50.9 51.1 51.0 51.5 51.4 52.1 51.9 51.3 50.6 51.9 51.1
Non-manufacturing PMI 53.2 53.6 54.4 54.2 55.2 55.9 56.2 56.4
55.7
52.4 51.4 56.3 54.9
Export ($, y/y) 3.4 -3.2 0.5 7.2 9.5 9.9 11.4 21.1 18.1 - 60.6 30.6 32.3
Import ($, y/y) -14.2 -16.6 2.7 -1.4 -2.1 13.2 4.7 4.5 6.5 - 22.2 38.1 43.1
Trade Balance ($bn) 45.2 63.0 46.4 62.3 58.9 37.0 58.4 75.4 78.2 - 103.3 13.8 42.86
Industrial profits (y/y) -34.9 -4.3 6 11.5 19.6 19.1 10.1 28.2 15.5 20.1 - 92.3
Financial sector 2020 2021
Apr. May Jun. Jul. Aug. Sep. Oct. Nov. Dec. Jan. Feb. Mar. Apr.
M2 (y/y) 11.1 11.1 11.1 10.7 10.4 10.9 10.5 10.7 10.1 9.4 10.1 9.4 8.1
Aggregate Financing
(RMBtn) 3.1 3.2 3.5 1.7 3.6 3.5 1.4 2.1 1.7 5.2 1.7 3.3 1.9
Net New Lending
(RMBtn) 1.6 1.6 1.9 1.0 1.4 1.9 0.7 1.4 1.3 3.6 1.4 2.7 1.5
Foreign Reserves ($tn) 3.1 3.1 3.1 3.2 3.2 3.1 3.1 3.2 3.2 3.2 3.2 3.2
Loan Prime Rate – 1Y 3.85 3.85 3.85 3.85 3.85 3.85 3.85 3.85 3.85 3.85 3.85 3.85 3.85
Loan Prime Rate – 5Y 4.65 4.65 4.65 4.65 4.65 4.65 4.65 4.65 4.65 4.65 4.65 4.65 4.65
Cross-border RMB
settlement (RMBbn) - 527 - 595 538 - 532 634 - 602 467 631
FDI (y/y) 8.6 4.2 3.7 12.2 15.0 23.7 18.4 5.6 8.4 6.2
Sources: Bloomberg, Bank of China
*Notes: Recently released data is displayed in bold and italic
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SELECTED FUTURE RELEASES
Date Indicator/Event Period Local Time Previous
14th
May FDI (%, y/y) May - 39.9
16th
May Fixed Asset Investment
(%, y/y) April 10:00 25.6
Retail Sales (%, y/y) April 10:00 34.2
Industrial Production (%, y/y) April 10:00 14.1
27th
May Industrial profit (%, y/y) April 09:30 92.3
Sources: Bloomberg, Bank of China
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