Less travel, more work this Lunar New Year - Capital Economics
China Economics

Less travel, more work this Lunar New Year

China Economics Weekly
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With new virus cases at their highest in 10 months, local governments and firms are discouraging workers from travelling during the upcoming Lunar New Year holiday. While this will deal a blow to China’s passenger transport and tourism sectors, it will also allow factories to keep running over the holiday and so may not undermine growth overall.

Virus flare-up to dampen holiday travel

China reported 210 new COVID-19 cases today (66 of them asymptomatic), the highest daily tally since March. The virus flare-up began in Hebei province but has spread more widely than previous localised outbreaks. A growing number of cases have been reported in Heilongjiang province, and a handful elsewhere.

The macro impact of this has so far been small. Congestion data suggest that the lockdown in Shijiazhuang, the capital of Hebei, is as severe as that a year ago. But there has been minimal disruption nationwide. (See Chart 1.)

Chart 1: Road Congestion (% of 2019 level, 7d ave.)

Sources: WIND, Capital Economics

But the latest outbreak has put policymakers and households on edge. Officials have begun trying to discourage workers from returning to their hometowns during the upcoming Lunar New Year holiday, when hundreds of millions usually criss-cross the country. Local governments and firms are rolling out incentives to encourage workers to stay put. And migrants will themselves be nervous about the risk of being unable to return to work after the holiday, as happened to many last year.

The economic impact of this may not be as bad as some fear, however. Of course, restrictions on long-distance travel will deal yet another blow to China’s passenger transport and domestic tourism sectors. But unless the virus situation deteriorates markedly, we expect activity within cities and towns to be mostly unaffected. A renewed slump in retail sales seems unlikely for example.

There are even some potential economic upsides. One reason many manufacturers have been quick to participate in official efforts to discourage travel is that it would allow them to keep factories running over the holiday. This is particularly true for exporters, who are benefitting from very strong pandemic-induced demand for their products and usually face a backlog of orders over the holiday, even in normal times.

The upshot is that while recent virus developments will affect the composition of Chinese economic activity this quarter, we don’t think it will necessarily undermine growth overall. We continue to expect a strong first half this year followed by softer second half as stimulus is withdrawn.

No honeymoon for US-China ties under Biden

President Biden will be focused on domestic issues once he moves into the White House on Wednesday. But he will be unable to ignore China completely. For a start, he will have to decide whether to suspend or modify Trump’s recent executive order banning eight Chinese apps including Alipay and WeChat Pay, which is due to come into force next month. Mr Biden also has a choice to make about the future of the Phase One trade deal – the purchase commitments it contains only run to the end of 2021.

Our view is that Biden won’t pursue new measures that indiscriminately target Chinese goods and firms in the way that Trump did. But we also doubt he will reverse the tide of US-China decoupling. He could even push harder on certain issues such as human rights and climate change.

The week ahead

We think Monday’s data dump will show that the economy ended 2020 on a stronger note, pushing GDP growth to a three-year high in Q4. This should pave the way for rate hikes but not yet – the Loan Prime Rate is set to remain on hold on Wednesday.


Data Previews

Activity & Spending (Dec.) Mon. 18th Jan.

Forecasts

Time (China)

Previous

Consensus

Capital Economics

Industrial Production (% y/y)

10.00

(+7.0%)

(+6.9%)

(+7.0%)

Fixed Asset Investment (ytd % y/y)

10.00

(+2.6%)

(+3.2%)

(+3.4%)

Retail Sales (% y/y)

10.00

(+5.0%)

(+5.5%)

(+6.5%)

Activity continues to strengthen, but at a slower pace

China’s economy continued to improve across most fronts in November. Survey data suggest that this trend continued last month, albeit at a slower pace.

We think industrial output growth remained strong but failed to gain further ground last month. Admittedly, trade data pointed to continued strength in both domestic and foreign demand. But the average of the official and Caixin manufacturing PMIs fell in December. (See Chart 2.)

Fixed investment probably continued to accelerate. Strong exports are prompting faster capital spending among manufacturers. And the continued pick up in the construction PMI suggests that infrastructure and property investment growth strengthened further last month.

The services PMIs and growth in car sales dropped back but remained strong and are still consistent with a faster year-on-year rise in retail sales volumes. An uptick in food prices last month will also boost the nominal retail sales figures.

Chart 2: Purchasing Manager Indices (PMIs)

Sources: CEIC, Markit, Capital Economics

GDP (Q4) Mon. 18th Jan. / Tue. 19th Jan.

Forecasts

Time (China)

Previous

Consensus

Capital Economics

GDP (% y/y)

10.00 (18th)

(+4.9%)

(+6.2%)

(+7.0%)

Full sectoral breakdown

09.30 (19th)

Growth surpasses pre-virus rates

After the sharp contraction in Q1, GDP rebounded close to its pre-virus path in Q3. And all the signs are that the economy was running above-trend in Q4.

Our in-house alternative to official GDP, the China Activity Proxy (CAP), pointed to growth of close to 8% y/y in November, a markedly faster pace than pre-virus. (See Chart 3.) The official monthly activity data – which feed into GDP data – paint a similar picture. And if anything, growth is likely to have edged up further in December, pointing toward the strongest GDP print since 2017.

The GDP breakdown is released a day after the headline data and contains some useful information. In particular, the breakdown covering services provides insight into the performance of key sectors such as tech and commercial services, for which high-frequency macro data are hard to come by.

Chart 3: GDP & CE China Activity Proxy (% y/y)

Sources: CEIC, Capital Economics

Loan Prime Rate (Jan.) Wed. 20th Jan.

Forecasts

Time (China)

Previous

Consensus

Capital Economics

Loan Prime Rate (1-year)

09.30

3.85%

3.85%

3.85%

PBOC signals no hurry to adjust rates yet

The Loan Prime Rate (LPR), the reference point against which banks price loans, was last reduced by 20 basis points in April last year. It replaced the PBOC’s traditional benchmark lending rate in August 2019, is published monthly, and set based on quotations provided by banks.

We think the LPR will be unchanged this month given that the PBOC did not adjust the rate on its medium-term lending facility (MLF) as it did ahead of the past three LPR moves. (See Chart 4.) This would have been the most straightforward way for the PBOC to influence the LPR, which is set as a spread above the MLF rate.

What’s more, through several large MLF injections in November and December, the PBOC has brought market interbank rates, which had risen in response to bond market jitters, back in line with the rate at which it offers short-run liquidity to banks. This suggests that the PBOC is keen to hold lending rates steady for now. Indeed, PBOC monetary policy chief Sun Guofeng stated just this week that the current level of interest rates remained appropriate.

Chart 4: Loan Prime Rates and MLF (%)

Sources: CEIC, Capital Economics


Economic Diary & Forecasts

Upcoming Events and Data Releases

Date

Country

Release/Indicator/Event

Time (China)

Previous*

Median*

CE Forecasts*

January

Mon 18th

Chn

GDP (Q4, q/q(y/y))

(10.00)

+2.7%(+4.9%)

+2.6%(+6.2%)

+3.2%(+7.0%)

Chn

Industrial Production (Dec.)

(10.00)

(+7.0%)

(+6.9%)

(+7.0%)

Chn

Retail Sales (Dec.)

(10.00)

(+5.0%)

(+5.5%)

(+6.5%)

Chn

Property Investment (Dec., ytd y/y)

(10.00)

(+6.8%)

(+7.2%)

(+7.2%)

Chn

Fixed Asset Investment (Dec., ytd y/y)

(10.00)

(+2.6%)

(+3.2%)

(+3.4%)

Chn

Surveyed Unemployment Rate (Dec.)

(10.00)

5.2%

5.2%

5.2%

Tue 19th

HK

Unemployment Rate (Dec.)

(16.30)

6.3%

6.4%

6.4%

Wed 20th

Chn

1-Year Loan Prime Rate

(09.30)

3.85%

3.85%

3.85%

Thu 21st

HK

Consumer Prices (Dec.)

(16.30)

(-0.2%)

(-0.4%)

(-0.4%)

Also expected during this period:

11th – 18th

Chn

Foreign Direct Investment (Dec., ytd)

(+5.5%)

17th – 18th

Chn

Foreign Exchange Net Settlement and Receipts (Dec.)

+23.2bn

TBC

Chn

Wages and Incomes (Q4)

TBC

Chn

Industrial Capacity Utilization (Q4)

TBC

Chn

Government Revenue and Expenditure (Dec.)

Selected future data releases and events:

January

Tue 26th

HK

Trade Data (Dec.)

Wed 27th

Chn

Profits of Large Industrial Firms (Dec.)

Fri 29th

HK

GDP (Q4, q/q(y/y))

Also expected during this period:

TBC

Chn

CBRC Data on Assets and Liabilities of Financial Institutions (Dec.)

TBC

Chn

Trade – Detailed Breakdown (Dec.)

Main Economic & Market Forecasts

%q/q annualised (%y/y), unless stated

Latest

Q4 2020

Q1 2021

Q2 2021

Q3 2021

2019

2020f

2021f

2022f

Official GDP

(+4.9)*

(+7.0)

(+20.0)

(+9.5)

(+7.5)

(+6.1)

(+2.5)

(+10.0)

(+4.5)

GDP (CE CAP-derived estimates)

(+5.1)*

(+7.6)

(+29.0)

(+10.5)

(+5.4)

(+4.0)

(+0.5)

(+10.0)

(+3.5)

Consumer Prices

(+0.2)**

(0.0)

(+0.6)

(+1.3)

(+1.3)

(+2.9)

(+2.5)

(+1.5)

(+2.0)

Producer Prices

(-0.4)**

(-0.5)

(+1.0)

(+2.5)

(+2.5)

(-0.3)

(-1.5)

(+2.0)

(+1.0)

Broad Credit (AFRE)

(+13.1)**

(+13.5)

(+12.0)

(+11.0)

(+10.0)

(+10.7)

(+13.5)

(+9.0)

(+7.5)

Exports (US$)

(+18.1)**

(+13.0)

(+12.5)

(+7.5)

(-1.0)

(+0.5)

(+3.0)

(+4.5)

(+4.0)

Imports (US$)

(+6.5)**

(+3.0)

(+11.0)

(+16.0)

(+9.0)

(-2.8)

(-1.5)

(+10.5)

(+5.5)

RMB/$

6.47

6.53

6.40

6.30

6.20

6.97

6.53

6.20

6.20

7-day PBOC reverse repo %

2.20

2.20

2.30

2.40

2.50

2.50

2.20

2.50

2.50

1-year Loan Prime Rate (LPR) %

3.85

3.85

3.95

4.05

4.15

4.15

3.85

4.15

4.15

1-year MLF Rate %

2.95

2.95

3.05

3.15

3.25

3.25

2.95

3.25

3.25

10-year Government Bond Yield %

3.12

3.20

3.30

3.20

3.00

3.14

3.30

2.80

2.60

RRR (major banks) %

12.5

12.5

12.5

12.5

12.5

13.0

12.5

12.5

12.0

CSI 300 Index

5,470

5,211

5,550

5,600

5,650

4,097

5,211

5,700

6,200

Hong Kong GDP

(-3.4)*

(+1.0)

(+9.5)

(+11.5)

(+9.6)

(-1.4)

(-5.0)

(+9.0)

(+3.5)

Hang Seng Index

28,497

27,231

28,550

29,450

30,350

28,184

27,231

31,250

35,000

Sources: Bloomberg, CEIC, Capital Economics *Q3; **Dec.; End of period


Julian Evans-Pritchard, Senior China Economist, julian.evans-pritchard@capitaleconomics.com
Sheana Yue, Assistant Economist, sheana.yue@capitaleconomics.com