Several forecasts now put China’s 2021 GDP growth at 8–10%. The case rests on momentum from 2020: output rose 3.2% in the second quarter, 4.9% in the third, and is expected to grow 6–7% in the fourth. If that pace carries over, the headline number for 2021 could look impressive.
I am less optimistic. After removing price and inflation effects, I expect real GDP growth of roughly 6%.
Household income will hold back consumption
In the first three quarters of 2020, China’s per capita disposable income was 23,781 yuan, up 0.6% year on year. A year earlier, the growth rate was 6.1%. The median per capita disposable income was 20,512 yuan, up 3.2% in nominal terms. After subtracting the 2.7% CPI increase over the same period, real median growth was only about 0.5%. The median figure is nominal and not adjusted for prices, but it still points to a weak income picture, especially for lower-income households.
That matters because lower-income households contribute more to consumption growth than high-income households do. With real income barely moving in 2020, I expect per capita consumption spending in 2021, compared with 2019, to grow by less than the 5.5% recorded in 2019. A comparison with 2019 is more useful than one with 2020, because last year’s consumption was heavily distorted by epidemic controls and is not a normal baseline.
The export tailwind is temporary
In 2020, production in the US and Europe was hit hard by the pandemic, and shutdowns became common. That increased demand for Chinese medical supplies and daily goods, giving China’s exports an unexpected lift. In the first 11 months of 2020, China’s exports reached 16.13 trillion yuan, up 3.7% year on year. Over the same period, US exports fell about 4% and France’s fell around 12%.
This divergence was not normal. Once the pandemic is brought under control, overseas production will recover, and China’s export advantage will narrow. The export boost of 2020 should not be treated as a permanent driver of growth.
No big monetary cushion
China did not respond to the pandemic with a massive monetary expansion. By the end of October 2020, M2 stood at 214.97 trillion yuan, up 10.5% year on year. In the same period of 2019, M2 growth was 8.2%. The increase is modest compared with 2009, when the response to the financial crisis pushed M2 growth from around 15% in 2008 to around 30%.
Without that kind of expansion, there is little reason to expect asset inflation to drive GDP growth in 2021.
Global deficits will weigh on demand and trade
In 2020, governments around the world ran large deficits. The US deficit was expected to reach $3.1 trillion, roughly $10,000 per American. Europe, Japan, and South Korea faced similar pressure. Debt has to be repaid eventually, and that will affect future consumption capacity.
Lower global consumption will hurt China’s exports. Lower-tech primary products are likely to be hit first.
Taken together, China’s consumption potential in 2021 does not look strong, and the trade environment may be worse than in 2020. Both domestic and external circulation will be under pressure, so 8–10% growth is hard to justify.
My guess is that the first quarter will be China’s strongest quarter, largely because of base effects. In the second and third quarters, as warmer weather reduces epidemic pressure, exports will face more competition and GDP growth may slow. The fourth quarter depends on how the pandemic evolves; current forecasts suggest it may be largely over by then.
I would be happy to be wrong. The experts may well know better—forecasting the economy is their profession—but a 6% real growth path seems more consistent with the income, export, money, and debt data.
Notes: The median disposable income figure is nominal and not price-adjusted. Consumption in 2020 was heavily affected by epidemic controls, so it is not a normal baseline. A rough calculation suggests exports contributed about 0.7 percentage points to GDP growth in 2020.