The successful handling of the pandemic earlier in the year means the economic recovery in China remains on track and real GDP growth was 4.9% year-over-year (y/y) in the third quarter. China has recovered the COVID-19 induced loss, as the economy has now expanded by 0.7% in the first three quarters of 2020 compared to the same period a year ago. The base for recovery is broadening as confidence continues to improve amongst consumers and private companies.
Industrial sectors have lead this recovery, and this was not different in the third quarter with 0.9% y/y growth reported year-to-date (1H20: -1.9% y/y). Meanwhile service sectors, which have lagged in previous quarters due to partial lockdowns, are now catching up given social-distancing measures were removed or significantly eased in the third quarter. A 0.4% y/y growth rate was reported year-to-date in the service sector (1H20: -1.6% y/y), signalling a more broad-based growth in the economy.
The sustained recovery supported confidence among consumers and private business, leading to continuing normalization in economic activities since early March. Notably, private fixed assets investment (FAI) improved significantly in the third quarter. Even as private FAI for the January - September 2020 period remained -1.5% below the same period a year ago, it still implies a 9.1% y/y growth in September alone. Meanwhile, growth rates of retail sales (consumption) and industrial production were much stronger in September than market expectation. State-led infrastructure investment remains an important supporting factor, growing 0.2% y/y in the past nine months (January - August 2020: -2.7% y/y).
Looking forward, domestic economic activities are expected to further normalize in the upcoming quarters. As consumers’ confidence improves, consumption might take over investment to become the major contributor to domestic demand. This should benefit the manufacturers of consumer goods, and further support private fixed asset investment.
In terms of policy response, supporting corporate sector and continued job growth remain the priorities. Chinese authorities will continue to use targeted credit measures, fiscal subsidies and tax/fee reductions to boost the real economy. At the same time, since local governments have almost completed the issuance plan of RMB 3.55trillion in special bonds, the momentum in infrastructure investment will continue into 1Q21. The Peoples’ Bank of China (PBoC) will retain its balanced and data-driven policy approach, emphasizing targeted funding supports to the real economy, while maintaining a relatively tight liquidity condition in financial and property markets.
Private fixed asset investment has rebounded as confidence is restored in corporate sectors
EXHIBIT 1: CHINA’S FIXED ASSET INVESTMENT
YEAR-OVER-YEAR CHANGE, 3-MONTH MOVING AVERAGE
Source: Bureau of Statistics of China, CEIC, J.P. Morgan Asset Management. Data reflect most recently available as of 19/10/20.
Investment implications
Given the uncertainties associated with the U.S. general election, the Chinese stock market has been volatile since the beginning of September. The resilient economic data released today foreshadows a continuous recovery in corporate earnings, helping to boost investor sentiment. The broadened economic recovery may start to lift the performance of lagging sectors. The potential for greater market clarity after the U.S. election, means A-share market might again start to track the official “slow bull” path. That said, investors should be selective and focus on fundamentals.
The cautious stance by PBoC supports domestic bond yields and a stronger renminbi exchange rate, making Chinese assets more attractive to global investors. As a result, inflows into Chinese onshore equity and bond markets are expected to continue. Foreign investment in Chinese bonds might gradually expand from government and development bank bonds to corporate credits, as investors gain more familiarity and comfort with the market.
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