China enters rebound in 2021 after noting the lowest economic growth in 40 years

China’s economy picked up during the fourth quarter, with growth beating expectations as it ended a gross coronavirus strike in 2020 in remarkably good shape and remained ready to expand further this year even as the global pandemic plummeted.

The world’s second largest economy has surprised many with the rapid recovery from the coronavirus outbreak, especially as decision – makers have also had to navigate tense US-China relations on trade and other fronts.

Beijing’s strict virus edges made it possible to contain the COVID-19 outbreak much faster than most countries, while government-led political stimulus and local producers intensified production to deliver goods to many countries paralyzed by the pandemic have also helped boost momentum.

Gross domestic product (GDP) expanded 6.5% year-on-year in the fourth quarter, National Bureau of Statistics data showed on Monday, faster than 6.1% forecast from economists in a Reuters survey, and followed the third quarter solid 4.9 % growth.

GDP increased by 2.3% by 2020, the data showed, making China the only major economy in the world to avoid a decline last year, as many nations fought to curb the COVID-19 pandemic. And China is expected to continue to push ahead of its peers this year, with economists predicting GDP to grow at the fastest pace in a decade at 8.4%, according to a Reuters survey.

“The higher-than-expected GDP figure indicates that growth has entered the expansive zone, although some sectors are still recovering,” said Xing Zhaopeng, an economist at ANZ in Shanghai.

“A policy closure will put counter-cyclical pressure on 2021 growth.”

Supported by strict antitrust and political stimulus measures, the economy has steadily recovered from a sharp decline of 6.8% in the first three months of 2020, when an outbreak of COVID-19 in central Wuhan city turned into a thoroughbred epidemic.

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Asia’s economic power package has been driven by a surprisingly resilient export sector, but China’s consumption – a key driver of growth – has dampened expectations in fears of a COVID-19 fall.

The data last week showed that Chinese exports increased more than expected in December, as coronavirus disorders around the world drove demand for Chinese goods, although a stronger yuan made exports more expensive for foreign buyers.

Nevertheless, China’s GDP growth in 2020 marked the weakest pace since 1976, the last year of the decades-long cultural revolution that destroyed the economy.

Overall, lots of brilliant economic data has reduced the need for more monetary easing this year, which has led to the central bank reducing some political support, sources told Reuters, but there would be no sudden change in political direction, according to key decision-makers.

On a quarterly basis, GDP increased by 2.6% in October-December, the Bureau said, compared with expectations of a 3.2% increase and a revised 3.0 profit in the previous quarter.

As the weakness of consumption was highlighted, retail trade fell by 3.9% last year, which is the first decline since 1968, according to records from NBS. Growth in retail trade in December missed analysts’ forecasts and fell to 4.6% from 5.0% in November when sales of garments, cosmetics, telecoms and cars declined.

However, China’s large manufacturing sector continued to gain momentum, with industrial production rising faster than expected at 7.3% last month compared to a year ago and reaching its highest level since March 2019.

Long-term risks 2021

Ning Jizhe, head of China’s Statistics Bureau, told a briefing that there would be many favorable conditions for maintaining China’s economic recovery in 2021.

This year, China’s 14-year five-year plan begins, which political decision-makers see as crucial in steering the economy past the so-called “middle-income trap.”

China still faces many challenges, not least the tensions between Beijing and Washington and how they would play under the new US government led by President-elect Joe Biden. In addition, labor costs, the aging population and a recent increase in credit levels increase the risks of an economy that is still trying to reduce a mountain of debt.

“We should be aware of the following problems in 2021: first, the imbalance in the economic recovery. Compared to investment and exports, consumption as a whole is weak and has not yet returned to normal levels, ”said Wang Jun, Beijing-based chief economist at Zhongyuan Bank.

“The second is the problem of excessive and rapid credit decline.”

The central bank is ready to keep its comparative lending rate unchanged in the coming months, while at the same time directing a slower slowdown in credit development in 2021, political sources have said.

The Chinese Academy of Social Sciences, a government think tank, sees the macro leverage rate jump by about 30 percentage points by 2020 to over 270%.

While this year’s expected growth rate of over 8% would be the strongest in a decade, led by an expected double-digit expansion in the first quarter, it is made less impressive when it comes from the low base that hit the pandemic in 2020.

Some analysts also warned that a recent recovery in COVID-19 cases in the northeastern part of the country could affect activity and consumption ahead of next month’s long New Year’s holiday.

“Control of population flows has begun, so the risk of a widespread outbreak of Covid should be small,” said Iris Pang, ING’s chief economist in China.

“But the risk of a technology war between China and some economies remains if the United States does not take action.”