The start of 2021 in China appears to be the polar opposite of last year. Whereas last year the economy was reeling during the first quarter, reflecting the start of the Covid-19 outbreak and the growing implementation of restrictive measures to combat its progress, this year its economy seems to be thriving. Both its GDP and export growth have resumed their pre-pandemic trajectory, placing China in stark contrast with most Western economies which are still stuck in the Covid-19 doldrums. Does this economic turnaround mark a return to China’s seemingly unstoppable rise to world economic dominance?
As ever, a peek under the surface of the headline numbers indicates a slightly different story. While there is no denying China’s economic momentum is leagues above other nations, growth is now being powered by different drivers than before the pandemic. The push towards increased globalisation has ground to a halt, with many governments and businesses seeking to broaden supply chain resilience and ease their prior reliance on Chinese production. And China’s authoritarian behaviour is drawing increasing criticism from global trading partners, who may be drawn into a more collaborative and united resistance under a Biden administration.
China will undoubtedly remain an economic force in 2021 but may not have everything its own way.
China’s robust and rapid recovery
China GDP may have posted its first contraction in over 40 years in Q1 2020, declining 6.8%, but its recovery has been robust and rapid. China’s economy grew more than expected last year as the economy expanded by 2.3% in 2020 compared to a year earlier.1 While compared to its recent norms, this figure may seem low, China was the world’s only major economy to deliver positive growth for the year 2020.
And while the encouraging roll-out of Covid-19 vaccinations should help deliver more widespread economic expansion this year, growth for many Western economies was more modest. On the other hand, the World Bank is currently forecasting China GDP growth to be near 8% in 20212, which would surpass its pre-pandemic level.
Forecast 2021: post-pandemic growth
15 economies expect to account for 74% of global growth in 2021
Source: Bloomberg analysis of IMF data. Notes: Individual economy’s forecast growth, as a share of increase of world GDP between 2020-2021. Based on purchasing power parity.
Underneath the surface
While the headline numbers suggest the economy is back to business as usual, there are indicators to suggest the game has changed. Historically, Chinese growth was driven by infrastructure investment, but this model shifted towards consumer spending under Xi Jinping in recent years. Yet, during 2020 this trend seemed to unwind. It was industrial production – benefiting from state support and lockdown relaxation– that provided the economic power, rising 7.7%, while retail sales disappointed and fell 3.9% for the year 20203 as it took longer to regain household’s confidence amid the pandemic.
Retail will rebound but this suggests that even in China, some consumer-facing businesses may struggle in a post-pandemic world. A 2020 rise in unemployment4 and a squeeze in household budgets5 points to the likelihood that consumption growth will take longer to fully recover.
So, the health of the domestic economy remains mixed, but what of China’s relationship with the rest of the world?
A new Chinese export boom?
China recorded its highest-ever monthly trade surplus in December, with global exports surging 18.1% year-on-year and exports to the US up 34.5%6. However, again the headline numbers seem to flatter and disguise longer-term trends that may not be quite so favourable.
The export bonanza to largely Western economies has been particularly pandemic-related, dominated by sales of personal protective equipment and working from home technology7. At the same time, demand from many other sectors has been depressed thanks to the worldwide economic slowdown. These should be short-term trends. Controlling the Covid-19 virus will likely slow demand for personal protective equipment, but as the world goes back to normal and economies return to growth demand for other China exports may not resume.
The combination of trade tensions during the Trump years and recognition during the pandemic that there is an over-reliance on Chinese goods has prompted governments and businesses alike to diversify their sourcing networks. While a full decoupling from China is considered unlikely, a strategy known as ‘China Plus One’ is expected to broaden global supply chains to incorporate more countries and sources for goods.
Ongoing international trade tension
An array of political disputes with China also means that going trading relationships cannot be taken for granted. The tit-for-tat imposition of tariffs between the Trump administration and Beijing garnered most attention, but questions about how to deal with China’s dominant economic position and authoritarian governance are being raised beyond the US.
In November 2020, the European Union (EU) published a paper entitled ‘A new EU-US Agenda for Global Change’,8 raising the need to defend against ‘authoritarian powers’ and ‘closed economies (that) exploit the openness our own societies depend on’. In this veiled reference to China, the paper envisions enhanced cooperation with the US to shape the digital regulatory environment, antitrust enforcement, data protection, foreign investment screening and cybersecurity.
Yet such interventions are not generally well received by Beijing. Australia’s call for an inquiry into the origin of the Covid-19 outbreak led to China imposing punitive tariffs on a number of Australian products, which threatens this valuable trading relationship which was worth USD $103bn in 20199.
Even so, the opportunity of trading with China remains highly prized. A free-trade deal between 15 Asian nations, including Japan and South Korea, the Regional Comprehensive Economic Partnership (RCEP), was signed in November. And despite its misgivings, the EU agreed an investment deal with China in December.
It seems clear that a more coordinated international response to deal with China is needed. Enter President Joe Biden…
New president, same attitude?
The incoming Biden administration will have a lot of plates to spin, both domestically and internationally. Yet, the US relationship with China will undoubtedly be one of its top priorities – the new US Treasury Secretary and former Federal Reserve chair, Janet Yellen, has already named China as ‘our most important strategic competitor’.
Any hopes Beijing might have of Biden being a soft touch are likely to be short-lived. He is expected to retain his predecessor’s hawkish stance towards China, even if he doesn’t mimic Trump’s tariff-centric approach. And he is also surrounding himself with a highly capable team. Alongside Yellen, he has appointed Katherine Tai as Trade Secretary, a Yale and Harvard alumnus, whose parents were born in China and is a highly experienced trade negotiator who spent years during the Obama administration fighting trade complaints against China.
Biden will also need to court his allies. The collective might of a truly united Western alliance might just be strong enough to take on the growing dominance of China.
China’s great investment potential remains
While China continues to present many political, business and ideological challenges, it is hard to deny that its economy boasts great potential. The clash between deglobalisation and domestic market opportunities might appear unstable, but at BNP Paribas Asset Management, we believe that instability leads to opportunity.
As the wider global economy starts to recover, China’s strong export outperformance may lose some steam, and the government is expected to extend its growth plan, driving investment openings across a swathe of consumer-orientated industries.
China’s recent commitments to improve its environmental credentials will involve massive infrastructure investment, as will its efforts to improve domestic telecoms and connectivity. Such vast spending programmes will create a multiplier effect for investment opportunities, across multiple sectors.
And the Chinese equity market is becoming more accessible for international investors, via both internationally traded shares like on the Hong Kong Stock Exchange (known as ‘H’ shares) and the onshore domestic Chinese equity market (‘A’ shares) listed in Shanghai and Shenzhen. Moreover, because China remains significantly under-represented in global indices, and because the country is often exposed to different market conditions, Chinese equities are considered highly complementary to a broader global equity portfolio.
We maintain a cautiously optimistic outlook for risk assets over the medium term and remain committed to looking beneath the surface of developing opportunities in China to find the best prospects for our clients.
The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay.
Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher than average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity, or due to greater sensitivity to changes in market conditions (social, political and economic conditions).
Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.
To find out more about the investment themes discussed here, please complete the form below.
SUBSCRIBE
Get insights straight to your inbox.
Information dedicated to professional investors
This website is launched and published by BNP Paribas Asset Management, as defined at the bottom of every page of the website (the “Company”) Opinions on this website are the judgement of the Company, at the time specified and may be subject to change without notice. The Company is not obliged to update or alter the information or opinions published on this website.
By accepting this disclaimer as set out below, you acknowledge its content as being the mutually agreed terms for your visit of and the use of this website. Whereas the term “website” includes all content and data provided and all sub- and micro-sites of this website. Further, as a user of this website, you acknowledge, that you are responsible for ensuring that the legislation applicable to you in your jurisdiction permits you to consult this website and you represent and warrant that you have the necessary means and skills to access this website and use it in the intended manner only. This disclaimer is subject to changes without prior notice. If any of the provisions of this disclaimer are judged to be illegal or unenforceable, the continuation in full force and effect of the remainder of them will not be prejudiced.
Certain sections and / or pages of this website contain separate and / or supplementary conditions, including separate disclaimers, which apply in addition to this disclaimer and any separate and / or supplementary conditions. In the event of discrepancy between this disclaimer and any separate and / or supplementary conditions, the separate and / or supplementary conditions relating to the sections or pages of this website will take precedence.
Site Contents
The information provided on this website is for general information purposes only. It is not intended to solicit the subscription of or the sale of any financial instruments, products or services. In no event shall the content of this website be deemed to be investment advice with respect to any financial instruments or investment services. In addition, the presentation of any information on financial instruments or investment services in itself does not allow the making of a contract and should not be construed as an offer or placement of any financial instruments, or solicitation for the purchase or sale of any financial or investment services to any persons in any jurisdiction.
The Company is authorised and regulated by the Financial Conduct Authority as an investment firm. The Company does not offer or purport to offer any direct lending or credit facilities to UK borrowers in connection with the SME Advanced Solutions platform or otherwise. Any potential borrowers should note that non-consumer loans and similar credit facilities are not regulated investments under applicable UK law and that non-consumer lending is not a regulated activity in the UK.
The Company disclaims any liability for any decision made on the basis of any information contained on this website. Potential investors and other market participants are encouraged to consult their own investment or financial advisers in connection with the purchase of any financial instruments or investment services or the entry into any borrowing or similar arrangements.
Exclusion of Liability
The Company including its parent company, subsidiaries, associated entities, directors, employees, representatives or suppliers, does not accept any responsibility arising in any way for errors in omissions from the information on this website and does not accept any liability for any loss or damage as a result of any person relying on any information on this website including any information provided by any third parties or by any inability to access this website at any time, except in the event of intentional or serious blame on its part.
Sources
All externally sourced information has been obtained from providers believed to be reliable, but its accuracy, timeliness, suitability and completeness is not guaranteed. For further information on fund(s), please contact the Company.
Links
This website may also contain links to websites which are published by third parties and third party websites may also feature links to this website. The Company has not reviewed any third party websites which refer to this website or to which this website refers for accuracy, topicality and / or completeness. The Company declines any liability in this matter. The fact that a link has been created to a third party website or that permissions have been given to a third party website to contain a link to this website, in no way means that the Company approves or recommends neither any content nor any products or services offered on a third party website. If you visit a third party website by following a link on this website this will be at your own risk.
Intellectual Property Rights
The information and data featured on this website is protected by law. Copyright and other intellectual property rights on this website (including registered and unregistered trademarks, brands, texts, graphics, logos, icons, sound recordings, software, etc.) are owned and licensed by the Company. You may use and / or print off the data solely for the purpose of personal, non-commercial use. You may not in any form or by any means:
• adapt, reproduce, store, distribute, print, display, perform, publish or create derivative works from any part of this website; or
• commercialize any information, financial instruments or investment services obtained from any part of this website;
• use any registered or unregistered trademarks from this website;
without the express prior written consent of the Company.
Privacy Regulations
By visiting this website, information on the access (e.g. date, visited sites, duration, IP-address) can be registered. Such data will be used in accordance with Cookies Policy of the website and will not be passed on to third parties neither for commercial nor for non-commercial reasons. By accessing this website you hereby agree, that the Company and its affiliates may record and process any personal data that you submit and which relates to you for the following purposes: customer management, including new business prospects, management of the contractual relationship, the prevention of irregularities, generating statistics and tests,. You also agree that this data may be passed on to all entities associated with the Company for the same purposes or to other persons in order to comply with any statutory obligation, or in the event of legal interests. You also agree with such notification, should the receiving person or entity be located outside the European Union, regardless of whether an adequate level of protection can be guaranteed for personal data in the country of receipt.
Within the Company and its affiliates, access to any of your personal data is restricted to those persons who need this data in order to fulfil their duties.
Electronic Mail Function
The option to use email to contact the Company is just one of the convenient features offered by the Company. You will be aware of the limitations regarding the reliability of sending and receiving emails, as well as the accuracy and security of email traffic, so you will understand that the Company cannot be held liable for any loss or damage arising as a consequence of queries which are not received, confirmed or processed, or as a result of the fact that your email may be intercepted by third parties. As a result you are expressly advised not to send any sensitive information via email, because it may not be secure. However, if you do so, it will be at your own risk.
Applicable legislation and jurisdiction in law
Your access to, visit to and / or use of this website and this disclaimer are governed by and will be interpreted in accordance with France legislation. The courts of France shall have sole jurisdiction regarding any dispute in this regard, notwithstanding the fact that the Company may choose another court that has jurisdiction regarding a similar dispute in accordance with an applicable item of legislation.