China’s economy grew 2.3% in 2020, accelerating global rise

With global output likely contracting 4.2% last year, China’s gains mean it increased its share of the world economy to 14.5%, according to World Bank.

Representational image | A market in Beijing, China. | Pixabay

China’s economy exceeded its pre-pandemic growth rates in the fourth quarter as its export-led recovery quickened, enabling it to expand faster than expected over the whole year even as major peers contracted.

Gross domestic product climbed 6.5% in the final quarter from a year earlier, propelling growth to 2.3% for the full year, the statistics bureau said Monday. Economists surveyed by Bloomberg had predicted 6.2% expansion for the quarter and 2.1% for the whole of 2020.

“China has more than returned to trend growth,” said Raymond Yeung, chief economist for Greater China at Australia and New Zealand Banking Group. The strong rebound means authorities can “prioritize structural reforms rather than economic reflation” in 2021, he said.

The V-shaped recovery was based on successful control of Covid cases and fiscal and monetary stimulus that boosted investment in real estate and infrastructure. Growth was further spurred by overseas demand for medical equipment and work-from-home devices, with exports expanding 3.6% in 2020 compared to the previous year.

Still, the investment and export-driven recovery exacerbated existing imbalances in the economy as domestic consumption lagged.

“There’s a huge discrepancy between production and consumption,” said Bo Zhuang, chief China economist at TS Lombard. “I am not very optimistic about domestic demand, as wage growth is not back to pre-pandemic levels.”

Other Key Highlights

• Industrial output rose 7.3% in December from a year earlier, and 2.8% in 2020
• Retail sales growth slowed to 4.6% in December from 5% in November. For the whole of 2020, sales shrank 3.9%, led by an almost 17% drop in catering and restaurants
• Fixed-asset investment was 2.9% bigger in 2020 than in 2019
• The economy expanded 2.6% on a quarter-on-quarter basis in the final three months of the year, down from a revised 3% in the July-September period
• The jobless rate was 5.2% at the end of December

The Chinext Index of small caps closed 1.9% higher, while the yield on the most actively traded contract of 10-year government bonds rose 3 basis points as of 4:12 p.m. in Shanghai to 3.17%, set for the highest in two weeks. The onshore yuan weakened 0.07% to 6.4864 per dollar as the greenback rebounded.

Emerging from the pandemic larger than when it started is a capstone to a dramatic year for the world’s second-largest economy, which began 2020 with a historic first-quarter slump when the coronavirus lockdowns brought most activity to a halt.

What Bloomberg Economics Says…

“The Chinese economy accelerated to a strong finish to 2020, though challenges at the start of 2021 could put a damper on growth.”

Data for December suggests that the gap between demand and supply is opening up again, and this may reflect the impact on consumption from recent viral outbreaks.

— Chang Shu, chief Asia economist

Even though China’s annual growth was the slowest in four decades, a global contraction in output means China increased its share of the world economy at the fastest pace on record, according to World Bank estimates. Based on projections from the International Monetary Fund, China will now overtake the U.S. by 2028, two years earlier than previously predicted, according to Nomura Holdings Inc.

Economists expect China’s GDP will expand 8.2% this year, continuing to outpace global peers even as they begin to recover due to a roll-out of vaccines.

Growth this year will depend on whether China can prevent a large-scale resurgence of virus infections, and on whether it can pass the baton of spending from local governments and large state companies to consumers and private businesses. The government has recently imposed travel restrictions on several northern cities due to small-scale virus outbreaks, including locking down the capital of Hebei province, a city of 11 million people near Beijing.

Consumption lags

Consumption spending per capita fell 4% in 2020 from a year earlier after adjusting for inflation, while investment in fixed assets such as real estate and infrastructure grew 2.9%, according to the statistics bureau. Industrial production surged, with China producing more than 1 billion tons of crude steel in 2020, an annual record.

“There is relatively large room” for China to raise the contribution rate of final consumption to economic growth, the head of the statistics bureau Ning Jizhe said after the data was released at a press conference in Beijing. For 2021, “it is necessary to improve the consumption ability of residents, improve consumption policy and environment, and cultivate more consumption growth drivers.”

China’s increasingly tense relationship with the U.S. could also weigh on the outlook. In his final weeks in office, President Donald Trump has tightened restrictions on Chinese businesses to curb the nation’s dominance in high-tech industries, roiling financial markets. It’s still unclear if the incoming administration under Joe Biden will maintain those measures.

The fiscal and monetary stimulus to support the economy through the pandemic has been accompanied by a surge in debt which authorities are now seeking to curb as the recovery takes hold. At a December meeting to lay out economic goals for 2021, the ruling Communist Party signaled that stimulus would be gradually withdrawn, although it would avoid any “sharp turns” in policy.

“Beijing is withdrawing stimulus, which will weaken investment in the coming months,” said Houze Song, a researcher on China’s economy at the Paulson Institute. –Bloomberg