The latest report from the International Monetary Fund projected China’s economy to pick up by 8.1 percent in 2021 before returning to trend and grow by 5.7 percent in 2022. Driven by exports and household consumption, China continues to recover despite the uncertainty brought by the COVID-19 pandemic.
Have a look at our previous article on COVID-19 Recovery in China’s Badly Hit Industries
On the other hand, China gained A+ ratings from the latest Fitch Ratings assessment, affirming China’s stable financial outlook. Thus, businesses are advised to keep abreast of the country’s progress to make well-informed decisions as well as monitor remaining risks amid the normalization of economic activities.
Contributing factors for economic growth
The Asian Development Outlook (2021) noted that investment was the primary driver of growth in 2020. This was characterized by manufacturing investments in line with strong exports and real estate investments as a result of increased housing demands. ‘
By 2021 and 2022, household consumption will have become the predominant contributor for growth, followed by investment and net exports. The ADO report also projected continued growth in the services sector including hospitality, recreation, and tourism as vaccination kicks off in all Chinese cities. However, financial services may be slowed down by decreased loan growth as banks heighten restrictions on mortgages and other property-related loans.
Increased demand in public consumption will boost business confidence and intensify labor markets. Moreover, consumer spending is expected to be the leading growth driver as the economy recovers. It can be noted that the public consumption and the service sector lagged during the first year of COVID-19 recovery as a relative effect of lockdowns and movement restrictions.
Current economic performance and some challenges
According to China’s National Bureau of Statistics, the country has recovered steadily through the first half of 2021, with a “sound growth momentum consolidated”. Based on the announcement, China’s overall GDP increased by 12.7 percent in the first half of this year.
Some notable growths in the following areas are reported by the bureau:
- Agriculture (crop production and output of pork increased)
- Mining, manufacturing, production, and supply of electricity, thermal power, gas, and water
- High-tech manufacturing
Production of new-energy automobiles, industrial robots, and integrated circuits
- Services sector
Transportation, storage and postal services and information transmission, software and information technology services
Online consumption such as express mail services, telecommunication, broadcast, television and satellite transmission services, internet, software, and information services
Monetary and financial services and insurance
- Retail sales of consumer goods
Catering, sports and recreational articles, communication equipment, cosmetics, and cultural and office supplies
- Investment in fixed assets
Infrastructure, real estate development
Private investments
High-tech manufacturing (manufacturing of computers and office equipment, medical equipment, measuring instrument and equipment)
High-tech services (e-commerce, R&D, and design services)
- Social sectors including health and education
- Exports of mechanical and electrical products as well as total value of imports
However, China remains to face uncertainties as the virus continues to mutate globally and external instability may be foreseen. Furthermore, the bureau statistics has indicated an uneven recovery as per domestic demand, urban employment, and retail sales.
Based on the analysis of the NBS report, domestic demand is going to be “challenging” as consumers remain concerned of their limited time and budget. On the other hand, the national report noted an increase in the jobless rate of young people aged 16 to 24.
Finally, although there has been considerable growth in the retail sales of goods, the data showed a slight drop from 12.4 percent in May to 12.1 percent in June. It is the slowest growth recorded for retail sales this year.
Nevertheless, the slower domestic demand is counterbalanced by the continued growth in China’s exports and manufacturing production. And although commodity prices went up, resident income continued to grow in the first half of the year.
Government support policies
The People’s Bank of China, China’s central bank, has cut the bank reserve equipment ratio (RRR) to address the economic pressure of uneven growth and consumer inflation. About RMB 1 trillion is expected to be released into China’s economy with this cut. Moreover, according to analysts, China is likely to maintain its one-year loan prime rate at 3.85 percent until the end of 2021.
The Chinese government has also released several preferential policies for businesses to cope up with the pandemic including:
- Tax relief and incentives, or deferred payments
- Relaxation of the Negative List of industries for foreign investments
- Streamlining of business set up procedures
- Financial loan support
Optimistic outlook for China businesses
The latest findings from the American Chamber of Commerce (AmCham) in China showed an optimistic view of foreign businesses in China amid the pandemic. According to the report, the majority of foreign companies do not have plans of leaving China, and some of them are rather looking forward to expansion in the next three years. However, it noted that foreign investment projects have lied low due to the reduced number of foreign executives in China.
AmCham further identified three main challenges that foreign companies are facing including:
- the rising cost of labor
- more expensive operations
- a lack of qualified personnel
Conclusion
The Chinese government aims to target annual growth of 6 percent by the end of this year. On top of that, it also plans to vaccinate 70 to 80 percent of the population no later than mid-2022.
Despite the unbalanced and slow-pacing recovery, China’s economy is still expected to follow a growth trajectory in the coming year.
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