Vaccines will jab holes in exporters’ sails - Capital Economics
China Economics

Vaccines will jab holes in exporters’ sails

China Economics Weekly
Written by Mark Williams
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The widespread rollout of vaccines in major developed economies is likely to take the wind out of the COVID-boom in online spending that has powered the extraordinary recent strength of China’s exports. But the domestic drivers of China’s economic rebound should continue to propel rapid growth for a while.

Lockdown boost to exports will fade…

The growing likelihood that effective vaccines will soon be available in major developed economies has brightened the global economic outlook. But an end to lockdowns and a revival of spending on services in major export markets will take the wind out of China’s recent export boom.

High spending on consumer goods in developed economies alongside demand for PPE and home-working equipment have been the drivers of the surge in China’s exports. China’s share of world exports has taken a step higher. (See Chart 1.)

Chart 1: China’s Goods Exports
(% of world total, 3m sum, 2010 prices)

Sources: CPB, Capital Economics

As spending patterns in developed economies normalise, China’s share of world exports is likely to revert to the previous trend. We now assume that this will happen over the course of next year (and that the recovery in total world exports will slow too – world exports were down only 1% y/y in September according to CPB). On this basis, a slowdown in China’s export growth attributable to the global rollout of vaccines is likely to shave 0.5% pt off China’s economic growth next year.

… but domestic drivers will remain strong

However, we are not cutting our growth forecast. We’ve been more upbeat than most this year about China’s near-term prospects. Recent data have still been stronger than we had expected. We estimate that China’s economy last month was expanding at a substantially faster rate in y/y terms than it would have had the coronavirus never appeared – the fastest growth in three years. (See Chart 2.)

Chart 2: China GDP (Q4 2019 = 100)

Sources: CEIC, Capital Economics

Economic behaviour has now returned to normal in almost all of China’s retail and broader service sector, which had been slower to recover: by October, seven months after Wuhan was released from lockdown, activity in services had returned to the same y/y growth rate as late last year. And stimulus lifted growth in other parts of the economy – investment and construction activity in particular above the pre-crisis rate.

We’ve pushed up our forecast for 2020 growth from 0.0% to 0.5% to reflect this strength. Other things equal, this would carry over into faster growth next year, but the size of the boost is about the same as the drag we’re expecting from exports. We therefore continue to expect China’s economy to expand 10% next year.

We can’t gauge exactly where this puts us relative to consensus since most analysts focus on official GDP. We suspect we’re still on the optimistic side for the near term though. The current consensus for GDP growth next year is 8%. An upbeat view also informs our expectation that the PBOC will push its policy rates higher next year.

The week ahead

We think next week’s PMIs will show that growth in manufacturing picked up slightly while the recovery in services activity slowed this month.

Data Previews

Manufacturing PMIs (Nov.) Mon. 30th Nov./ Tue. 1st Dec.

Forecasts

Time (China)

Previous

Consensus

Capital Economics

“Official” PMI (30th Nov.)

09.00

51.4

51.5

51.6

Caixin/Markit PMI (1st Dec.)

09.45

53.6

53.5

53.8

Industrial growth continues to accelerate

The manufacturing PMIs have continued to rise in recent months (see Chart 3), thanks to strong exports and a recovery in demand domestically. We think this momentum continued into November.

Admittedly, the new orders component of the Standard Chartered SME survey fell a touch in November. But there are signs from the flash PMIs of China’s major trading partners that foreign demand continued to improve this month. What’s more, industrial metals prices have risen in recent weeks. Taken together, growth in the broader manufacturing sector may have picked up slightly.

Chart 3: Manufacturing PMIs

Sources: CEIC, Markit, Capital Economics

Non-manufacturing PMIs (Nov.) Mon. 30th Nov./ Thu. 3rd Dec.

Forecasts

Time (China)

Previous

Consensus

Capital Economics

“Official” Non-man. PMI (30th Nov.)

09.00

56.2

56.0

56.0

Caixin/Markit Services PMI (3rd Dec.)

09.45

56.8

56.2

56.5

Pullback in car and property sales hints at slower services recovery

The services PMIs have risen since a dip in August. But we think the pace of the recovery probably slowed a bit last month.

Most signs suggest that the recovery in services activity has continued as the negative shock to the labour market has almost fully reversed. But high frequency data hint that the pace of improvement has eased. Both car and property sales fell back in November. (See Chart 4.) Pent-up demand from better-off households may be fading. Tighter borrowing restrictions may also be starting to weigh on property sales.

Meanwhile, we expect the construction index of the official PMI to remain elevated but drop back slightly. Local governments are likely to have stepped up infrastructure spending in order to meet budget targets. But this was probably offset by weaker housing starts in response to tougher restrictions on borrowing by developers.

Chart 4: Car & Property Sales (% 3m/3m, seas. adj.)

Sources: Wind, Capital Economics

Economic Diary & Forecasts

Upcoming Events and Data Releases

Date

Country

Release/Indicator/Event

Time (China)

Previous*

Median*

CE Forecasts*

November

Mon 30th

Chn

“Official” Manufacturing PMI (Nov.)

(09.00)

51.4

51.5

51.6

Chn

“Official” Non-Manufacturing PMI (Nov.)

(09.00)

56.2

56.0

56.0

December

Tue 1st

Chn

Caixin Manufacturing PMI (Nov.)

(09.45)

53.6

53.5

53.8

HK

Retail Sales (Oct.)

(16.30)

(-12.9%)

(-10.0%)

(-10.0%)

Thu 3rd

Chn

Caixin Services PMI (Nov.)

(09.45)

56.8

56.2

56.5

Selected future data releases and events:

December

Mon 7th

Chn

Trade Data (Nov.)

Chn

Foreign Exchange Reserves (Nov.)

Wed 9th

Chn

Inflation Data (Nov.)

Also expected during this period:

10th – 15th

Chn

M2 Money Supply (Nov.)

10th – 15th

Chn

Net New Lending (Nov.)

10th – 15th

Chn

Aggregate Financing “AFRE” (Nov.)

10th – 18th

Chn

Foreign Direct Investment (Nov.)

TBC

Chn

Vehicle sales (Nov.)

TBC

Chn

CBRC Data on Financial Institutions (Assets, Earnings, NPL, Nov.)

TBC

Chn

Job Openings to Job Seekers Ratio (Q3)

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)*

(+6.0)

(+19.0)

(+8.5)

(+6.5)

(+6.1)

(+2.0)

(+9.5)

(+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

(+0.5)**

(+1.0)

(+1.2)

(+2.0)

(+2.1)

(+2.9)

(+2.5)

(+1.5)

(+2.0)

Producer Prices

(-2.1)**

(-0.5)

(+1.0)

(+2.5)

(+2.5)

(-0.3)

(-1.5)

(+2.0)

(+1.0)

Broad Credit (AFRE)

(+13.7)**

(+14.5)

(+13.0)

(+12.0)

(+11.0)

(+10.7)

(+14.5)

(+10.0)

(+8.0)

Exports (US$)

(+1.4)**

(+13.0)

(+15.5)

(+16.5)

(+10.0)

(+0.5)

(+3.0)

(+6.0)

(+5.5)

Imports (US$)

(+4.7)**

(+2.0)

(+11.0)

(+19.0)

(+15.0)

(-2.8)

(-3.0)

(+7.0)

(+7.0)

RMB/$

6.58

6.50

6.40

6.30

6.20

6.97

6.50

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 %

3.31

3.00

2.90

2.90

2.80

3.14

3.00

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

4,945

5,100

5,250

5,400

5,700

4,097

5,100

5,700

6,200

Hong Kong GDP

(-3.4)*

(+1.0)

(+9.5)

(+11.0)

(+9.6)

(-1.4)

(-5.0)

(+9.0)

(+3.5)

Hang Seng Index

26,765

27,000

28,050

29,125

30,175

28,184

27,000

31,250

35,000

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


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