Policymaker silence, festival spending, the Ox & GDP

Spring Festival spending subdued

During the last sexagenary cycle of China’s lunisolar calendar, Years of the Ox were by some way the weakest for GDP. (See Chart 1.) 2021 will be different. The suppression of output during last year’s lockdown means that y/y growth rates for all kinds of indicators are about to go stratospheric.

Chart 1: Average GDP growth by animal year during the last sixty years (%)*

Sources: CEIC, Capital Economics * China’s traditional calendar follows a 60-year (sexagenary) cycle

The jury is still out on our view that this year’s travel restrictions around Lunar New Year will boost China’s economy. From 11^th to 17^th February, the first week of the “spring festival”, long distance passenger numbers (road, rail, air and boat) were 23% of the 2019 level: the restrictions were effective. Sales by major retailers were only 4.9% higher in the same period. That’s a much smaller increase over two years than we would expect if consumption patterns were back to normal. The number of people in shopping malls was still 14% lower than in 2019.

But the crux of our argument was that the containment measures would allow factories to avoid lengthy shutdowns. Strong orders from China and abroad give firms an incentive to ramp up operations as soon as possible. If we’re right, the lunar new year restart that is normally spread over a month will be well underway already now.

Policy signals through silence

The weakness a year ago will obscure any messages we might hope to find in the incoming y/y data. Seasonally-adjusted figures will have to be treated with caution too. But once the temporary boost from earlier factory opening has passed, it’s increasingly likely that momentum will slow. Retail sales and investment both decelerated in December. Our China Activity Proxy slowed too. The PMIs both declined in January.

There’s nothing too much to worry about here: these indicators all still point to strength. Some pullback was inevitable if we’re right that output is currently well above potential. But signals from policymakers suggest that policy support is being withdrawn. That is likely to have a marked impact in the second half of the year. Perhaps most striking is the continued silence on local government bond quotas: it looks like none will be issued before the National People’s Congress in March. The People’s Bank’s has similarly signalled through its inaction in response to the spike in interbank rates before New Year that it is comfortable with monetary tightening. Credit growth appears to have peaked in any case. Past experience suggests this will be reflected in slower activity in about six months’ time.

Long-run lessons from the pandemic

We launched a new Long Run service last week and looked at what our forecasts imply for China here. If we’re right about a second half slowdown, that may refocus attention on the structural factors that will shape economic performance over coming decades. One legacy of the pandemic is likely to be greater confidence in Beijing in the superiority of China’s economic model. A similar conclusion drawn during the Global Financial Crisis helped stall economic liberalisation in the years that followed. But a look back at the path of productivity growth since then suggests that a better lesson to draw is that, while the state’s ability to mobilise resources is a big benefit in a crisis, it saps growth over the long run.

The week ahead

There are few scheduled releases of note next week, other than the loan prime rate on Monday.

Data Previews

Loan Prime Rate (Feb.) Mon. 22^nd Feb.

LPR likely unchanged for now

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 do not anticipate any changes in the LPR this month. Admittedly, the PBOC allowed market interbank rates – banks’ marginal funding cost – to reach a two-year high in January. This was partly due to a seasonal tightening of liquidity ahead of Chinese New Year when demand for cash surges. But the PBOC appeared to be content to let it happen – indeed, rather than responding by injecting liquidity, it drained liquidity further on a net basis. That signals a hawkish tilt.

We think this will in time be reflected in an increase in the LPR. But the PBOC has not adjusted the rate on its medium-term lending facility (MLF) as it did ahead of the past three LPR moves. (See Chart 2.) This is the most straightforward way for the PBOC to influence the LPR, which is set as a spread above the MLF rate. That suggests that the PBOC won’t take the next step towards tightening yet.

Chart 2: 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*
February
Sat 20th		Chn	Foreign Exchange Net Settlement and Receipts (Jan.)	–	–	–	–
Mon 22nd		Chn	1-Year Loan Prime Rate	(09.30)	3.85%	3.85%	3.85%
		HK	Consumer Prices (Jan.)	(16.30)	(-0.7%)	(+1.0%)	(+1.0%)
Tue 23rd		Chn	Home Prices 70 Cities (Jan.)	(09.30)	+0.1%	–	–
Wed 24th		HK	GDP (Q4, Fin., q/q(y/y))	(16.30)	+0.2% (-3.0%)	(-3.0%)	(-3.0%)
Thu 25th		HK	Exports (Jan.)	(16.30)	(+11.7%)	–	(+11.4%)
		HK	Imports (Jan.)	(16.30)	(+14.1%)	–	(+16.7%)
		HK	Trade Balance (Jan., HKD)	(16.30)	-45.7bn	–	-50.0bn
Selected future data releases and events:
February
Sun 28th		Chn	Official PMIs (Feb.)
March
Mon 1st		Chn	Caixin Manufacturing PMI (Feb.)
Wed 3rd		Chn	Caixin Services PMI (Feb.)
		HK	Retail Sales (Jan.)
Fri 5th		Chn	National People’s Congress Meeting

Mark Williams, Chief Asia Economist, mark.williams@capitaleconomics.com
Sheana Yue, Assistant Economist, sheana.yue@capitaleconomics.com