Understanding the drivers that generate economic growth in China, and making predictions about the future, has always been difficult, but is even harder than usual this year due to factors which are well outside the control of China’s Government.
According to this thoughtful article by Rhodium Group, the outlook for GDP growth for 2021 depends on your views in answering three key questions, which are:
- how will the pandemic shape economic activity in China and the rest of the world, and will there be a reversion to “normal”?
- how will “advanced economy pushback” against China evolve, and will it affect external balances or alter investor and consumer confidence about the future?
- what will China’s policy approach look like, and how will this impact on China’s household consumption and private business investment?
As the article points out: “note that the first two factors are largely beyond Beijing’s control. China will be affected by the course of the pandemic beyond its borders, and decoupling will continue in some form despite the departure of Trump”. It’s also worth noting that China’s Government has never had to face up to challenges like these before, at least in living memory, and there are unpredictable forces at play that will affect both sentiment and confidence, the two elements that have propelled China’s growth for the past 10 years, if not longer.
An optimistic view on China’s growth in 2021 (e.g IMF’s growth forecast of 8.1% for 2021, made at the start of the year) is reliant on “controlling the pandemic at home and abroad, and shoring up global demand” which would allow “the twin thrusters of household consumption and private investment” to return to pre-pandemic levels. This scenario is starting to feel over-optimistic for geo-political reasons. As the article notes, “whether liberal democracies would respond by building higher fences or more bridges to Beijing is another question”.
Rhodium’s best guess for 2021 is that GDP growth will be 5.6% which is slightly less than China’s own prediction of “6% or better” (as announced at the National People’s Congress earlier this month) and is based on their view of the likely growth of private demand ($687 billion less than the IMF’s predictions for household consumption, private investment and net exports). They conclude their analysis with “optimistic projections presume private sector resilience. Without those market animal spirits, it is hard to believe in growth above 5.6% this year, even though base effects may make the first half of 2021 seem like boom times”.
This is a sobering assessment and requires the world to face up to the economic reality of an aggressive and confrontational approach towards China. The short term economic pain associated with this will be significant and yet I’m convinced that there are better ways of addressing ideological differences and tightening up necessary trade and investment related issues (IP protection, overreach, trade barriers etc.) without seeking to confront and/or threaten China and try to slow them down. Where would we be now if the same approach towards containment had been applied to America in the 1960s!