Virus disruptions linger but vaccines deliver - Capital Economics
China Economics

Virus disruptions linger but vaccines deliver

China Economics Weekly
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This week’s lockdown of Shijiazhuang, a city of 11 million, is a reminder that sporadic flare-ups of COVID-19 are still imposing an economic cost on China. Domestic passenger travel in particular remains depressed. Vaccines hold the key to a full return to normality and so it’s encouraging that the phase 3 trial results announced in recent days suggest that China’s two main vaccine candidates are highly effective. We expect the rollout to be rapid, with much of the population inoculated by year-end.

COVID-19 battle not over but vaccines offer hope

Shijiazhuang, a city of 11 million and the capital of Hebei, was put into lockdown on Thursday, after recording 117 new coronavirus cases the previous day (67 of them asymptomatic). Mass testing is being implemented and travel severely restricted.

Previous local outbreaks have rapidly been brought under control. But sporadic flare-ups ensure that some in China remain cautious despite the risk of infection being low overall. Public transport ridership and cinema ticket sales are still somewhat subdued for example. Fear of infection is one reason; fear of losing green status on the WeChat-based health code system is another – anyone with a red code, which is triggered by proximity with an infection, is forced to isolate. That helps explain why long-distance travel remains depressed. (See Chart 1.)

Chart 1: Long-Distance Passenger Traffic
(person-km, % y/y)

Sources: CEIC, Capital Economics

These constraints on economic activity have been more than offset in aggregate by stimulus, strong exports and household spending in other areas. But they mean that for China too, things won’t be fully back to normal until vaccines are rolled out widely.

We got some positive news on that front this week, with phase 3 trials in Brazil showing a 78% efficacy rate for the Sinovac jab. This follows similar results published last week for the Sinopharm vaccine. China has reportedly already stockpiled 600mn doses of these vaccines and is capable of producing another 1.6bn doses this year. Distribution is likely to be rapid. China had administered 4.5mn doses as of 31st December – nearly as much as the rest of the world combined at that time. And the plan is to inoculate 50mn people by the Lunar New Year holiday. Given that the government excels at mass mobilization, we wouldn’t be surprised if they are able to vaccinate much of the population by year end.

PBOC intervention unlikely to alter RMB trend

The renminbi started the trading year with a bang, rising 1.2% against the US dollar on Monday, the second largest daily gain on record. The currency has since traded sideways, however. This partly reflects developments in the US, which have supported the dollar. But there are also signs that the PBOC stepped in following Monday’s jump in order to slow the pace of appreciation.

In recent days, the offshore exchange rate has been unusually strong relative to the onshore market, which hints at intervention in the latter. The PBOC has also set recent fixings weaker than warranted by market moves and on Tuesday it relaxed restriction on capital outflows. This highlights the PBOC’s continued aversion to abrupt shifts in the renminbi.

That said, ever since it bungled exchange rate reform in 2015, the PBOC has become wary of pushing the currency too far out of line with fundamentals. On that note, the economic tailwinds that led us to turn bullish on the renminbi back in September remain largely in place. As such, our year-end forecast of 6.20/US$ (current: 6.46) still looks about right, even if the PBOC occasionally leans in the other direction.

In case you missed it

One of the most important macro developments of the past few weeks has been new explicit limits on the share of loans allowed to flow to the property sector. We discussed the implications here.

The week ahead

Data will likely show that exports remained buoyant last month and inflation ticked up but that tighter credit conditions weighed on borrowing.


Data Previews

Net New Bank Loans, M2, AFRE (Dec.) 9th – 15th Jan.

Forecasts

Time (China)

Previous

Consensus

Capital Economics

Net New Bank Loans (RMB)

+1,430bn

+1,250bn

+1,220bn

M2 (% y/y)

(+10.7%)

(+10.7%)

(+10.5%)

Aggregate Financing “AFRE” (RMB)

+2,134bn

+2,130bn

+2,100bn

Credit growth continues to slow as bond defaults weigh

Growth in aggregate financing (AFRE), the PBOC’s measure of broad credit, quickened during most of 2020 thanks to policy stimulus, but edged down in November due to worries over credit risks. We think that this slowdown continued in December.

We expect the net increases in bank loans and AFRE to have moderated last month. But given that these figures are highly seasonal, we prefer to focus on growth in the outstanding values which are a better guide to underlying trends in credit creation.

On this basis, bank loan growth likely slowed. The pace of bank lending is driven mainly by quantitative controls such as loan quotas, which surveys suggest are now being tightened. Our bottom-up estimates show that issuance of corporate bonds also eased last month. (See Chart 2.) A key factor has been the recent bout of bond defaults, which has led to cancelled bond issues due to concerns of weak demand. Shadow credit likely weakened further due to related worries over credit risk. Other forms of non-bank financing appear to have picked up, including government bonds and equity. But this is unlikely to have prevented a further slowdown in broad credit growth.

Chart 2: Direct Financing (outstanding, % y/y)

Sources: CEIC, WIND, Capital Economics

CPI, PPI (Dec.) Mon. 11th Jan.

Forecasts

Time (China)

Previous

Consensus

Capital Economics

CPI (% y/y)

09.30

(-0.5%)

(0.0%)

(+0.4%)

PPI (% y/y)

09.30

(-1.5%)

(-0.8%)

(-1.2%)

Deflation short-lived as food prices rise

Consumer prices fell year-on-year for the first time since 2009 in October, largely due to sharp declines in pork prices. But food price inflation looks to have reversed its downward trend last month, while demand-side price pressures continued to recover.

High-frequency data point to a rise in food prices in December. (See Chart 3.) In particular, the data show that pork prices rose sharply. Given that we expect core inflation to remain unchanged, the headline rate probably turned positive last month.

Meanwhile, factory gate prices continue to recover. Commodity prices, which correlate with producer prices, rose last month. Weekly producer price data and the output price components of the PMIs also suggest that the PPI picked up thanks to the ongoing improvement in economic activity.

Chart 3: Wholesale Food Prices (%y/y)

Sources: CEIC, Capital Economics

Trade (Dec.) Thu. 14th Jan.

Forecasts

Time (China)

Previous

Consensus

Capital Economics

Exports (USD, % y/y)

(+21.1%)

(+15.0%)

(+15.0%)

Imports (USD, % y/y)

(+4.5%)

(+5.7%)

(+10.0%)

Trade Balance (USD)

+75bn

+71bn

+65bn

Trade resilient amid COVID-19 flare-ups abroad

Exports have continued to strengthen recently thanks to the strength of retail sales (particularly online) among China’s major trading partners. A rapid domestic recovery has also boosted import growth.

After reaching a near three-year high in November, we think export growth slowed slightly but remained rapid last month. The new export order components of the PMIs dropped back slightly in December. (See Chart 4.) What’s more, apart from the eurozone, the new orders component of the PMIs among China’s main trading partners fell last month which suggest that foreign demand may have moderated.

In contrast, imports should have continued to accelerate. Price effects will have turned more favourable in December. And the construction component of the PMI suggests that the import-incentive sector continued to benefit from the ongoing stimulus last month.

Chart 4: Exports & PMI – New Export Orders

Sources: CEIC, Refinitiv, Capital Economics


Economic Diary & Forecasts

Upcoming Events and Data Releases

Date

Country

Release/Indicator/Event

Time (China)

Previous*

Median*

CE Forecasts*

January

Mon 11th

Chn

Consumer Prices (Dec.)

(09.30)

(-0.5%)

(0.0%)

(+0.4%)

Chn

Producer Prices (Dec.)

(09.30)

(-1.5%)

(-0.8%)

(-1.2%)

Thu 14th

Chn

Exports (Dec., USD)

(+21.1%)

(+15.0%)

(+15.0%)

Chn

Imports (Dec., USD)

(+4.5%)

(+5.7%)

(+10.0%)

Chn

Trade Balance (Dec., USD)

+75.4bn

+71.0bn

+65.0bn

Fri 15th

Chn

Home Prices (Dec., 70 Cities)

(09.30)

+0.1%

Also expected during this period:

9th – 15th

Chn

M2 Money Supply (Dec.)

(+10.7%)

(+10.7%)

(+10.5%)

9th – 15th

Chn

Net New Lending (Dec.)

+1,430bn

+1,250bn

+1,220bn

9th – 15th

Chn

Aggregate Financing “AFRE” (Dec.)

+2,134bn

+2,130bn

+2,100bn

13th – 20th

Chn

Foreign Direct Investment (Dec., ytd)

(+6.3%)

TBC

Chn

Vehicle Sales (Dec.)

TBC

Chn

PBOC Balance Sheet data (Dec.)

TBC

Chn

PBOC Depository Corp. Survey (Dec.)

Selected future data releases and events:

January

Mon 18th

Chn

GDP (Q4)

Chn

Spending and Activity Data (Dec.)

Tue 19th

HK

Unemployment Rate (Dec.)

Wed 20th

Chn

1-Year Loan Prime Rate

Thu 21st

HK

Consumer Prices (Dec.)

Also expected during this period:

17th -18th

Chn

Foreign Exchange Net Settlement and Receipts (Dec.)

TBC

Chn

Wages and Incomes (Q4)

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

(-0.5)**

(0.0)

(+0.6)

(+1.3)

(+1.3)

(+2.9)

(+2.5)

(+1.5)

(+2.0)

Producer Prices

(-1.5)**

(-0.5)

(+1.0)

(+2.5)

(+2.5)

(-0.3)

(-1.5)

(+2.0)

(+1.0)

Broad Credit (AFRE)

(+13.6)**

(+13.5)

(+12.0)

(+11.0)

(+10.0)

(+10.7)

(+13.5)

(+9.0)

(+7.5)

Exports (US$)

(+21.1)**

(+13.0)

(+12.5)

(+7.5)

(-1.0)

(+0.5)

(+3.0)

(+4.5)

(+4.0)

Imports (US$)

(+4.5)**

(+3.0)

(+11.0)

(+16.0)

(+9.0)

(-2.8)

(-1.5)

(+10.5)

(+5.5)

RMB/$

6.48

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 %

3.14

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

5,514

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

27,549

27,231

28,050

29,125

30,175

28,184

27,250

31,250

35,000

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


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