Review and Outlook of the Economic and Financial Markets in 2020-2021
This report reviews the development of China’s macro-economy and financial markets during 2020 and advances views and forecasts based on major events at home and abroad during 2020.
Views
1. The transformation of China’s economic growth model was slow. The COVID-19 pandemic exerted substantial influence on all sectors of the Chinese economy, suspending the transformation strategy originally aimed at efficiency and de-leveraging. In response to external shocks and to ensure stability on “six fronts” and maintain security in “six areas”, the government was obliged to issue expansionary policies, but these policies were constrained by the government budget.
2. China’s economy had witnessed ”Fault Lines” at multiple levels. First, in the real economy sector, there was a fault line between the supply side and the demand side. The upstream industry was short of orders, due to insufficient downstream demands. The worldwide impact of the COVID-19 outbreak slowed the upstream transition, further exacerbating these issues. Second, there was a gap between financial markets and the real economy. The real economy was deflating while the financial market was inflating.
3. The leverage problem had given rise to an extremely prominent structural contradiction within China’s economy. Leverage in three sectors, namely government, firms, and households, had been rising and draining resources from each other. Under the significant impact of the pandemic, economic stabilization relied on investment, but such policy was limited by the leverage.
4. International trade shifted from globalization to regionalization, and China was actively seeking alternatives amid the impact of the pandemic and the uncertainty of the U.S. policy toward China. Due to the sharp drop in international demand as a result of the COVID-19 outbreak, and despite China’s reliance on (for example) medical device exports and the deepening of regional trade, China’s overall exports data was far from satisfactory. A large number of export-oriented enterprises except for medical industries suffered tremendously. China’s import data also suggested that domestic demand remained weak.
5. In terms of monetary policy, the flow of money was guided by “six fronts” and “six areas”, but was still faced the problem of blocked transmission mechanism and idle funds. In response to the pandemic, excessive and easy monetary policy is not effective at providing solutions to some specific enterprises’ problems. Financial policies based on local conditions were needed.
6. The bond market as a whole was still in a weak cycle. Unexpected events throughout 2020 further exasperated the debenture bond market. Monetary policy was not as loose as the market expected and supervision was gradually strengthened. Due to various factors, the economic conditions were not allowed to generate a declining interest rate on bonds.
7. The performances of the commodity market were heterogeneous but the overall market basically was climbing from a low point. The recovery of import demand after the resumption of domestic production was the major reason. International political uncertainty had also led to fluctuations in the price of crude oil and other commodities.
Ten Economic Forecasts
1. Poorly-performed economic data caused by the pandemic during the first half of 2020 is expected to lead to a much higher-than-expected positive growth rate during the first and second quarters of 2021.
2. After the back out of the temporary short-term policies used in combating the COVID-19 pandemic in China, the supply side is expected to continue to be strengthened in 2021 which reflects the robust demand on the industrial side, thus creating active and benign demand for external financing. However, given the stimulating monetary and fiscal policy during 2020, it is uncertain the growth rate of investment and financing in 2021 will still be high.
3. In the context of the dual circulation, the potential for further development of the manufacturing industry deserves significant attention. Internationally, China’s manufacturing industry will further be underpinned not only because China’s important position in the global trade chain has been consolidated during the nation’s battle against the pandemic but also because the U.S.’ suppression on China’s high-tech manufacturing industries has motivated domestic industries.
4. After the Political Bureau of the CPC Central Committee put forward the concept of “demand-side” reform, end-user consumption upgrading and the enhancement of consumption willingness are becoming promising and the consumption-side is expected to slowly recover to pre-pandemic levels during the first half of 2021. However, it should be noted that in 2020 the consumption capacity of the residential sector was severely restricted by the problem of “low-income and high-leverage” and the medium and long-term trend of the credit of the residential sector has not changed. The Taihe Economic & Financial Outlook believes that the long-term sustainability of consumption data should be further observed.
5. The structure of fixed asset investment in 2021 will further diverge. Specifically, the strength of infrastructure investment will be weak; the resilience of real estate investments can still last until the end of 2021, and it is unlikely for the growth rate to decline in the short term; the possibility of strong manufacturing investment has been greatly increased, which plays an important role in easing the structural problem of fixed asset investment.
6. Import and export will be affected to a large extent by the uncertainty of the international situation. Even if the COVID-19 vaccine has been inoculated progressively through the international community, it will take some time for the external demand to recover. In terms of structure, the volume of trade within the framework of the Regional Comprehensive Economic Partnership (RCEP) is expected to further rebound and China’s import and export activities with regional trading partners such as ASEAN, Japan and South Korea may become more significant. The Taihe Economic & Financial Outlook believes that there is a high degree of uncertainty in China’s export and import trends in 2021, but it can still be predicted that the continuous more-than-expected export operation may end in 2021.
7. Both industrial prices and retail prices are highly likely to rise moderately, but considering the continuous fluctuation of oil prices, it is necessary to pay attention to the correlation between PPI and oil prices. If monetary policy is not easily transmitted, there is a risk that deflation will quickly link up with inflation. If the dual circulation strategy progresses smoothly, the risk of serious price differentiation between upstream and downstream may be avoided to some extent.
8. Monetary policy is expected to gradually return to normal within the framework of “prudential macroeconomic policies” and the supply of liquidity will be relatively restrained as long as there is no black swan events. However, given that the adverse impact of the pandemic on the economy is far from over, the Taihe Economic & Financial Outlook believes that it is highly unlikely that monetary policy will be significantly tightened to “push” various sectors to deleverage.
9. The structural problem of leverage in various sectors will exist for a long time but gradual improvement can be expected. In particular, the possibility of a substantial decline of the leverage ratio is not high in the context that the manufacturing industry starts to step up its efforts and financial deflation is expected to ease. However, leverage transfer among sectors will be rapid and the volatility during this period needs to be vigilant.
10. The pandemic has lengthened the timeline of China’s economic recovery and the “slowdown” in Chinese economic growth may be extended by one or two more years than expected, which coincides with the “reform period”, posing great challenges for the next steps in economic development.
Four Major Forecasts on the financial market
1. The performances of corporate bonds will be further differentiated and more defaults are likely to occur. The bond market is expected to undergo a process of credit contraction and de-falsification and the spread between corporate bonds and government bonds is likely to increase.
2. Given the budget challenges, the government will gradually reduce the burden of “guaranteeing” enterprises. We anticipate that some local governments’ bonds will also face the pressure of repayment, and in the faith of rigid redemption of government bonds may be gone.
3. Monetary policy is based on the principle of “six fronts” and “six areas”. With the increased global uncertainty in 2021, China’s equity market will remain fluctuating. Although China can still attract overseas capital as a relative safe haven, there is no basis for a bull market.
4. With the gradual recovery of the global economy and subsequent demand, there is still room for commodity prices to further recover and rise, especially for industrial raw materials such as ferrous metals and non-ferrous metals. Crude oil prices also depend on changes on the supply side.
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