How Much Will China's Growth Stumble in 2021?

Mish

Michael Pettis,  Houze Song, and Marco Polo China offer competing views on China's growth.

Spotlight on China's Growth

I do not expect negative growth, rather a slowdown in growth. Here are some competing views.

Marco Polo China

  1. My take on how Chinese economy will going to perform in 2021 @MacroPoloChina . The main theme is that 2021 growth will be shaped by policy tightening vs consumption recovery.
  2. Growth target will likely be 5% in 2021, meaning Beijing will not do much to help growth. Meanwhile, addressing risks such as local government debt and property overheating are back on the agenda, and current growth drivers such as fiscal spending and property will be stifled.
  3. Yet, recovery will eventually pick up steam in the second half as the labor market improves and consumption strengthens. This is because there still exists substantial potential for consumption to rebound.
  4. At first look, as growth has already surpassed pre-Covid level in the last quarter, it seems an exaggeration to say there remains large potential. Yet, besides recovering from Covid, the Chinese economy is recovering from the economic slowdown in 2018-19.
  5. Labor market had already been below full employment before Covid, and lost additional jobs in 2020. Cumulatively, ~10 million ln jobs lost since 2018. Because of weak job market, households saving rate is elevated, which has hindered consumption recovery so far.
  6. Despite lack of policy support, we believe labor market will continue to improve, as China’s labor market has demonstrated remarkable ability to self-heal. For example, in 2019, despite no growth rebound in 2019, migrant employment growth actually accelerated.
  7. Although policy tightening will cause slowdown in 1H, overtime, continued labor and consumption recovery will help growth to regain momentum in the second half. Chinese economy will likely see a shallow V-shaped growth in 2021

China's Migrant Labor Market 

China's Migrant Employment

That chart accompanied  Tweet #5 above.

Michael Pettis Views on Chinas Growth

Pettis estimates 6%-7% which surprises me. I would have guessed Pettis the same as Houze Song.

Song and Pettis

Thanks to Michael Pettis and Houze Song for the discussion.

What Does China Want?

I believe that is the key question. If China wants 6% it will find a way to pull that off, even if it is a gross distortion of reality.

The risk is the same as always. To achieve growth at any cost China will allow property bubble expansion and lean on State Owned Enterprises (SOE) for growth. 

If so, much of the growth will again be malinvestment, with the payback down the line. 

Malinvestment adds to perceived growth now but later writeoffs will subtract from future growth. 

Mish

Comments (52)
No. 1-14
Realist
Realist

When China wants to boost growth, they invest (or malinvest) in a lot of infrastructure projects. Hydro-electric dams. Solar and Wind Farms. Roads. Bridges. High Speed Rail. Electricity Grids. Cellular towers. Fibre optic grids. Hospitals. Schools. And so on. The advantage is that these are long-term positives for their economy as well as short term stimulus.

In addition, they often stockpile as many commodities as possible, particularly when prices are low to support their long-term growth.

They just had record export numbers, which demonstrate that their economy is growing at decent levels.

However, they are currently experiencing a resurgence in virus cases and are locking down tens of millions in some regions of the country. That is how they have managed to keep a lid on the pandemic compared to most other countries. They will take whatever drastic actions are needed to prevent the virus from spreading. This could indeed slow short-term growth. They will take short-term economic pain in exchange for long-term gain. That's what separates China from so many "western" economies. We will sacrifice almost anything, including our children and grandchildren's futures, for some short term gains. (Which also explains why the US has had 430K covid deaths so far.)

Dodge Demon
Dodge Demon

There is probably enough demand for them to ship their fly ash-laden gypsum board over here again like 15 years ago.

truthseeker
truthseeker

Mish I don’t know how much China’s growth includes what they earn from foreign investment. Anyway a friend of mine sent me two long amazing articles showing all the different investments China has made in America I was not aware of. If you don’t have them I think you would like to see them but they would sorta overwhelm your blog so could I send them to you somewhere else?

Sechel
Sechel

China is on too of Covid-19. at least more than the U.S. which puts them on a better projector for economic growth. They're not rebalancing as they should and China's growth will ironically be subsidized on the backs of the consumer making them poorer. China just doesn't seem capable of making the hard choices

numike
numike

China has "quietly unveiled an economic strategy fit for a new Cold War". It aims to become self-sufficient in vital goods and technologies, on the assumption that trade wars with the West will persist and intensify. Foreign trade and investment will continue, but favoring "Sinosphere" partner countries in Asia. “A lot of this is about preparations for a possible war across the Taiwan Straits”

PecuniaNonOlet
PecuniaNonOlet

I doubt China’s growth will stumble, they are building a new silk road to places like Africa with almost a billion potential consumers. What’s that you say, not a lot of money in Africa? Well what does that matter when you can just print money, hand out and then do it again. Its the drug dealer way, your first hit free but once you are an addict, you are going to pay eventually.

The realization that “big tech” can kick off whomever whenever and controls key segments of the online platforms will push other nations to seek alternatives. China is somewhat positioned to deliver on next gen cars, next gen semiconductors, next gen telecom, etc. What has the US shown the world but a clown conman can be put in to run the country and change the terms of any agreement on a whim.

I do wonder what biden will do with the transpacific partership. The rest of the world has been moving on, we will need to see what comes next.

Eddie_T
Eddie_T

Food for thought on China.

Just looking at the long term trend.....GDP growth peaked in 2007 and it’s been in a long term slowing trend ever since, just a couple of new peaks.....recovery after 2008 dip....now a new and similar pattern showing up as new post-COVID recovery peak.

That’s stimulus, not real growth. The decline is tapering, but it’s been close to .5%.year for years coming into the pandemic.

The population pyramid in China looks almost as bad as Western Europe. Here’s China.

Western Europe

Japan

Hint: Those all look pretty sucky for the future.

Here’s China in 1980, for comparison. Fairly dramatically different, no?

I think these debt to GDP numbers are probably low....but they’re 3X US levels even by these conservative estimates.

Did somebody say something about US junk bonds being in trouble?

China is trying to get out of the hole by putting Africa in debt slavery for resources. Here’s an interesting chart.

Yes, Djibouti’s debt to China is 100% of GDP.

From the same article.

"The authors also warn that “[d]ebt sustainability metrics are poorer than generally perceived, especially so in about two dozen developing countries that borrowed heavily from China during the boom decade of 2003-2013,” and that “hidden overseas debts pose serious challenges for country risk analysis and bond pricing.”

I think that’s banker speak for “some of this funny money isn’t going to be repaid”

JoeJohnson
JoeJohnson

Don't worry we will outpace China once Fed announces it is buying munis later this year.

Eddie_T
Eddie_T

Peter Zeihan....the China part starts at about 17:20. I think he might just be right about a lot of this....and in any case it won’t be long before we know, because he’s talking big changes in the short term...the next ten years.

Eddie_T
Eddie_T

This is a different take, but it addresses how a Chinese credit collapse would play out if it did happen. I agree with the author that it is the Chinese propensity for saving that is their greatest strength.

Casual_Observer
Casual_Observer

Whatever the numbers are coming out of China, we know they are fraudulent. The same applies to Russia, Iran, North Korea and a host of other autocratic governments where truth is manufactured.

Johnson1
Johnson1

also......doing business with Chinese companies usually involves bribes. A coworker once told me about a previous job experience he had were it was a surreal experience walking down the sidewalk to a meeting in Beijing with 300k in cash in a briefcase to give to a CCP member as part. of a deal. He was so scared to lose or have the briefcase stolen.

So stories like this makes me wonder what goes on behind the scenes in those deals Hunter made with China.

Then again...,money talks in politics.

GeorgeWP
GeorgeWP

Yes the Chinese have a population crunch coming. Japan and Italy are already in, rest of Europe and Korea heading that way. But projections of heaps of cheap labour going to be available in Africa and Islamic countries. Hence the rush to make new friends and influence people and get them into debt traps. What is Europe going to do. Can they match the Chinese influence given Europe (and the US) has a bit of a baggage in those regions due to killing lots of the locals in the past couple of centuries.

auloa
auloa

China is going to become in one of the most important economic in the world who knows if even more than USA, even thought than covid-19 affect them they still been a relevant part of it, i think that chine could have a better economy is they start to work more with cryptocurrencies https://www.mintme.com/news/custom-cryptocurrencies-and-new-year-s-resolutions because they have a good relosutions for this year!


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