Supported by both domestic and external demand recovery, China’s economic growth kept accelerating going into 4Q20. Real gross domestic product (GDP) rose by 6.5% year-over-year (y/y) in the quarter, back to China’s trend growth rate. More importantly, the recent growth driver is more comprehensive in comparison to previous quarters. As domestic activities largely resumed, previously lagging service sectors have caught up with industrial sectors.

Monthly economic activity data suggested that the major growth driver has shifted from state-led infrastructure investment to demand from consumers and private enterprises. Supported by rising confidence among consumers and private businesses, consumption and private corporate investment continued to normalize in recent months. In particular, private fixed assets investment increased by 51.6% y/y in Dec. 2020 (November 2020: -5.7% y/y). Meanwhile, infrastructure investment still played a role as a stabilizer.

In addition to recovery in domestic demand, normalization of the global economy also supported the growth in China. Facing resurgent infections, manufacturing activity around the world is still impacted by lockdowns and hence leading to a varying degree of supply shocks. Chinese manufacturers stepped up to meet the demand from global consumers and enterprises. As a result, Chinese industrial production increased by 7.3% y/y in December 2020, and export growth remained as high as 18.1% y/y in the same month.

Looking ahead, domestic economic activities are likely to improve in 2021, and further support from the global recovery are expected. Particularly, in the first quarter of 2021, we expect to see volatile growth readings as a result of the re-escalating pandemic control measures.

Due to the recent resurgence of new COVID-19 cases in several locations, central, provincial and local governments are calling on people to reduce mobility and gatherings during the Lunar New Year. Incentives are offered to keep migrant workers in factories during the holidays instead of returning to their hometowns. As a result, the seasonality in Chinese export and industrial production during Lunar New Year might be broken as the dip in production seen in previous holiday seasons may not take place this year. This could lead to unusually high growth rates in this quarter. On the other hand, consumption growth might be moderate in January and February with reduced travels and family gatherings.

In terms of policy response, the central bank and fiscal authority might return to a more neutral stance when economic activities are back on track. The People’s Bank of China may adopt a balanced and data-driven policy approach, emphasizing targeted funding supports to the real economy. However, when the property market is heating up in tier one cities, the overall liquidity condition might be tightened to curb potential asset bubbles. Local government debt levels might also become a consideration, and stricter fiscal discipline will be resumed.

EXHIBIT 1: CHINA: CYCLICAL INDICATORS

Source: CEIC, National Bureau of Statistics of China, J.P. Morgan Asset Management.
Guide to the Markets – Asia. Data reflect most recently available as of 18/01/21.

Investment implications

Thanks to the progress in vaccine development and distribution, global economic recovery is likely to continue throughout the year. China’s strong economic data released today might forebode a continuous and broad-based recovery in corporate earnings. That said, subdued monetary stimulus may put a cap on further valuation re-rating in the equity market, which has already accumulated significant gain in 2020. Under such circumstances, investors should be focused on quality and long-term growth potential. As China’s economic growth remains on track, we remain constructive about sector leaders in technology, consumption and financial services.

Over the longer investment horizon, structural changes in the Chinese economy during the 14th Five-year Plan (2021 to 2025) should be the key theme for investors to follow. More details should be revealed in the upcoming National People’s Congress meetings in early March. In order to achieve higher self-sufficiency in key technologies, the Chinese government will keep supporting domestic technology sectors. Some key domestic players might benefit from China’s huge market scale and policy support and grow at a faster pace in 2021 and beyond.

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