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CHINA ECONOMIC WATCH Biweekly Research Report 14 th May 2021 China’s Post-Pandemic Economic Model Authors: Dr. Gerard Lyons Dr. Lu Li 李璐 London Research Centre [email protected] Chang Liu 刘畅CFA London Trading Centre [email protected] Approved by: Dr. Kang Qu 瞿亢 London Research Centre [email protected] Recently Released Economic Indicators Key Theme Recently Released Economic Indicators China’s post-pandemic economic model, dual circulation, is a strategy that looks set to deliver solid, sustained growth, but with several areas that merit particular attention. The success of dual circulation is also critical to the 2035 goal of delivering technology advances and doubling income per head. China’s PMIs suggested that growth remains moderate for now and pointed to growth having been more balanced recently, with services continuing to catch up to industry and construction after a period of underperformance. China’s trade data for April showed that shipments remained buoyant, with both export and import growth surging last month.

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Page 1: CHINA ECONOMIC WATCH

CHINA ECONOMIC WATCH

Biweekly Research Report 14th May 2021

China’s Post-Pandemic Economic Model

Authors:

Dr. Gerard Lyons

Dr. Lu Li 李璐

London Research Centre

[email protected]

Chang Liu 刘畅,CFA

London Trading Centre

[email protected]

Approved by:

Dr. Kang Qu 瞿亢

London Research Centre

[email protected]

Recently Released Economic Indicators

Key Theme

Recently Released Economic Indicators

China’s post-pandemic economic model, dual circulation, is a

strategy that looks set to deliver solid, sustained growth, but with

several areas that merit particular attention. The success of dual

circulation is also critical to the 2035 goal of delivering technology

advances and doubling income per head.

China’s PMIs suggested that growth remains moderate for now and

pointed to growth having been more balanced recently, with services

continuing to catch up to industry and construction after a period of

underperformance.

China’s trade data for April showed that shipments remained

buoyant, with both export and import growth surging last month.

Page 2: CHINA ECONOMIC WATCH

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Dear reader,

A warm welcome to our biweekly publication,

China Economic Watch, that is being made

available publicly for the first time.

The aim is to help keep you informed fully

about latest developments in the Chinese

economy.

Each edition will contain a focus piece on a key

topic, plus a round-up of latest economic data.

We hope that you find it informative and useful.

KEY THEME China’s Post-Pandemic Economic Model

By Gerard Lyons*

China’s economy has rebounded strongly from

the pandemic. As the year progresses, a prudent

monetary policy aimed at curbing the expansion

of credit and keeping inflation in check may slow

overall growth to a more sustainable pace. Despite

this, 2021’s growth should still meet the official

target of more than 6%, following last year’s 2.3%.

Attention this year, however, should focus not just

on China’s growth rate but on its new growth

model of dual circulation that was unveiled last

year.

China has no shortage of ambitious aims. Dual

circulation sits alongside the 14th Five Year Plan,

unveiled in March, that will drive immediate

economic policy. The success of dual circulation

is also critical to the 2035 goal of delivering

technology advances and doubling income per

head.

What does dual circulation mean, and what should

we make of it?

Dual circulation is a policy of two parts: domestic

and international. Domestic circulation is aimed

at transforming and growing China’s economy.

The international component, meanwhile, appears

less about boosting China’s global role and more

about how, through external resources, it can

support its domestic economic aim to boost living

standards and create jobs.

Page 3: CHINA ECONOMIC WATCH

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This is a good time for China to unveil a new

economic strategy. As China’s population ages,

its trend rate of economic growth is expected to

slow.

Also, rising geopolitical tensions and the legacy

of the pandemic points to a more difficult and

uncertain international environment. Trade

tensions have been evident in recent years. While

in areas of mutual benefit such as addressing

climate change, China will play a key role and

international cooperation is inevitable, the US and

UK look set to adopt a more robust relationship

with China in defence, security and areas linked

to human rights. Bilateral business and financial

ties will have to develop within this new context.

Thus, dual circulation is viewed by some as a

more inward-looking growth model. It certainly

should make China more self-sufficient and

resilient to external shocks. But it may be wrong

to suggest the external dimension is any less

important, given China’s focus on the Belt Road

initiative and its decision to join RCEP, an Asian

regional trading bloc, last year.

China, too, is not immune to the same policy

challenges facing all major economies, of high

public debt and exceptionally low interest rates.

By necessity, this reinforces the need for China to

move away from debt-fuelled growth and aim to

move up the value-curve in the face of future

intense competition and the growth of artificial

intelligence.

The issue is whether dual circulation can deliver

China’s new pro-growth agenda?

A decade ago, attention was on the need for China

to overcome the Middle Income Trap where many

countries find it difficult to move from middle

income to high income. This is not mentioned

now, as China’s middle class continues to swell,

as income standards rise.

Yet, the concerns that underpinned it are reflected

in the need for China to move from an economy

with an over-reliance on exports and investment

to one where it sees higher domestic consumption.

The share of domestic consumption is still low.

In my view, this policy is likely to succeed, but

there are six areas that merit particular attention.

One, success depends upon a stronger role for the

private sector. China cannot run its economy in

the future in the same way that it has run it in the

past, given its increasing size and scale. There will

be a need for the market mechanism to play a

bigger role, including deeper and broader capital

markets and deeper and broader insurance

markets. In the latter, China may provide a role

model in terms of pension provision for its middle

classes.

In March 2020, the Central Committee said that

the market needs to play a more important role in

the allocation of land, labour, capital and

technology. Then in May, they stated that there is

a need to minimise government intervention in

micromanagement of the economy. I agree.

The implication of this is probably the most

important one for China, namely that while the

direction of its economy is clearly upwards, one

should expect increased volatility along that

upward trend.

Page 4: CHINA ECONOMIC WATCH

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Two, infrastructure is critical for success. Hard

infrastructure is an important part of dual

circulation, with increased transport and

broadband connectivity. So too is soft

infrastructure, covering skills and training. There

is also the need to not lose sight of institutional

infrastructure, as divergences at a regional level

point to greater devolution of policy. This is a

challenge anywhere, but perhaps more so in China

given its scale.

Three, there is a need to ensure compatibility

between domestic and international circulation,

whereby the higher wages that would flow from a

successful domestic policy do not undermine

competitiveness. To address this, improving the

supply side of the economy needs to go hand in

hand with boosting domestic demand.

Boosting domestic demand needs: improving the

social safety net, higher wages, generating jobs,

and ensuring a successful social welfare model,

perhaps using the dividends from successful state-

owned enterprises to fund this. On the supply side,

reform is key to future success, including boosting

research and development and raising

productivity.

Four, resilience will be a feature in a post-Covid

world. China is heavily dependent upon imports

in some important strategic sectors such as

technology, energy and food. This sits alongside

other policy aims, such as ‘Made in China 2025’,

where China wants to shift from low to high end

manufacturing focused on robotics, information

technology and clean energy. Indeed, China’s

target to achieve net zero carbon emissions by

2060 points to it working with others, like the UK,

on the green agenda, as we are likely to see this

year.

Five, the importance of a level playing field.

Import substitution is not always possible, nor is

it the best solution. China needs to support the

multilateral trading system, as it makes sense for

itself and the global economy. In doing so it

would overcome fears in some circles that there is

not a level playing field for foreign firms looking

to sell into China.

Six, one size does not fit all. Different regions of

China will grow at different speeds. In my view,

there is a strong case to use the Greater Bay Area

as a pilot for the success of dual circulation, This

Area is likely to be one of the most dynamic parts

of the world economy in coming decades and it

includes nine cities in Guangdong Province, plus

Macau and Hong Kong. This points to a vibrant

world class cluster and to an innovative

technology hub with global influence, plus Hong

Kong’s importance as a financial centre.

China’s new growth model has been unveiled at

an appropriate time, given the changing domestic

and international environment. Dual circulation is

likely to evolve. As I have outlined here, there are

a number of areas that merit attention as it is a

policy that looks set to deliver solid, sustained

growth.

* Dr Gerard Lyons is an international economist based in London. He is

an independent, non-executive director of Bank of China (UK)

Page 5: CHINA ECONOMIC WATCH

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RECENTLY RELEASED ECONOMIC

INDICATORS

PMIs Consistent with Slight Slowdown in

Growth

The latest PMI surveys offered diverging

messages about manufacturing conditions in

April, with the official survey pointing to a slight

slowdown in growth but the Caixin index pointing

to an improvement in conditions. However, with

the official non-manufacturing survey revealing a

slowdown in the broader economy too, overall

activity likely slowed slightly last month. This is

consistent with the picture painted by the high-

frequency data in recent weeks.

Specifically, the official manufacturing PMI

declined to 51.1 last month from 51.9 in March, a

three-month low. But the Caixin index instead

rose to 51.9 from 50.6, hitting a four-month high

(Chart 1).

Chart 1: China Manufacturing PMI

Sources: WIND, Bank of China

The breakdown of the surveys also diverged

across most components, with the Caixin index

showing pick-ups in production, new orders and

employment but the official survey pointing to

declines in all three areas.

One area where the two surveys were in partial

agreement was on price pressures. The breakdown

of the Caixin index showed signs of the economy

hitting capacity constraints and price pressure

starting to build, with the input price component

of the survey rising to the highest since 2017.

While the price components of the officials survey

edged down last month, these also remained near

cycle highs, consistent with a further rise in prices.

Beyond the manufacturing sector, growth in

the rest of the economy appears to have slowed

in April. The official non-manufacturing PMI fell

last month to 54.9 from 56.3 in the previous

month, though this is still the second-highest

outcome this year (Chart 2).

Chart 2: China Official Non-Manufacturing PMI

Sources: WIND, Bank of China

The decline was driven in large part by weaker

conditions in the construction sector: the

construction PMI fell sharply to 57.4 last month

from 62.3 in March, corroborating the recent high

frequency data in showing that building activity

has slowed noticeably in recent weeks. The

decline in the services PMI appears mild at first

glance, with the headline index falling only to

34

36

38

40

42

44

46

48

50

52

54

56

34

36

38

40

42

44

46

48

50

52

54

56

2014 2015 2016 2017 2018 2019 2020 2021

Caixin/MarkitOfficial

25

30

35

40

45

50

55

60

65

25

30

35

40

45

50

55

60

65

2014 2015 2016 2017 2018 2019 2020 2021

HeadlineServicesConstruction

Page 6: CHINA ECONOMIC WATCH

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54.4 from 55.2. However, the resilience in the

headline reading was mainly due to strong

sentiment, with firms’ expectations of future

activity only edging down slightly last month.

Underlying demand weakened more noticeably,

with the new orders and employment sub-

components both seeing sharper falls (Chart 3).

Chart 3: Official Services PMI Breakdown

Sources: WIND, Bank of China

The decline in the services PMI appears mild at

first glance, with the headline index falling only

to 54.4 from 55.2. However, the resilience in the

headline reading was mainly due to strong

sentiment, with firms’ expectations of future

activity only edging down slightly last month.

Underlying demand weakened more noticeably,

with the new orders and employment sub-

components both seeing sharper falls.

Taking a step back though, despite signs of a

slowdown, economic growth remains moderate

for now and is continuing to push the economy

towards capacity constraints. While policy

headwinds are likely to drag growth gradually

lower in coming months (particularly in the

second half of this year) price pressures are likely

to rise fairly sharply in the near term, which will

probably be reflected in a further rise in producer

price inflation. However, if we are right about a

slowdown in demand later this year, any pick-up

in inflation should prove transitory. This points to

the PBOC keeping policy rates and reserve

requirement ratios unchanged this year.

Robust Demand Props Up Trade Data

China's export data beat market expectations

again last month, with export growth rebounding

after a slight slowdown in March. Import growth

surged in April, hitting its highest rate of annual

increase since 2010.

Specifically, growth in exports rose to 32.3% y/y

in US dollar terms in April from 30.6% in March,

the second-fastest pace since 2018. Growth in

imports jumped to 43.1% y/y last month from

38.1% (Chart 4).

Chart 4: China Trade (Jan. and Feb Averaged, % y/y)

Sources: WIND, Bank of China

Of course, the recent moves in y/y export growth

is due in large part to the weak base from a year

ago, when COVID-19 disruptions led a sharp fall

in activity. However, even in m/m terms,

exports were strong last month, rising by 9.4%

in April.

25

30

35

40

45

50

55

60

65

25

30

35

40

45

50

55

60

65

13 14 15 16 17 18 19 20 21

Expected operation activityNew ordersEmployment

-30

-20

-10

0

10

20

30

40

50

60

70

-30

-20

-10

0

10

20

30

40

50

60

70

2016 2017 2018 2019 2020 2021

Exports

Imports

Page 7: CHINA ECONOMIC WATCH

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Turning back to the detailed y/y data. The

breakdown of the figures by geography showed

that shipments to the US weakened slightly while

those to the rest of the world picked up. This may

be an early sign that consumption in the US is now

shifting back towards services from goods as

lockdown measures are being eased.

Turning back to the detailed y/y data. The

breakdown of the figures by geography showed

that shipments to the US weakened slightly while

those to the rest of the world picked up. This may

be an early sign that consumption in the US is now

shifting back towards services from goods as

lockdown measures are being eased.

That said, the product breakdown showed that

global demand for many manufactured goods

remained robust for now, with shipments of toys,

garments and LCD displays all holding up well.

Exports of medical equipment, a major prop to

exports last year, continued to slow.

On the imports side, the jump in growth last

month was again in large part due to price

effects as commodity price inflation continued

to rise. But while commodity imports

(particularly oil) were a major driver of the recent

strength in imports, inbound shipments of other

products, including vehicle parts, also accelerated

markedly in April, pointing to solid domestic

demand.

Looking ahead, we expect imports to continue

to outperform exports in the near term. Export

growth is probably close to a peak and should start

to slow gradually in the months ahead as base

effects become less flattering and global

consumption shifts towards services and away

from goods following a ramping up of vaccine

roll-outs. In fact, the latest exports orders data are

consistent with a further slowdown in outbound

shipments in the next few months. By contrast,

imports should continue to benefit from elevated

commodity price inflation and a further recovery

in consumer demand in the next few months

underpinned by stronger labour market conditions,

though headwinds from a withdrawal of policy

support is likely to constrain the scale of the

recovery further ahead.

Page 8: CHINA ECONOMIC WATCH

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LATEST PEOPLE’S BANK OF CHINA

ACTION

China’s Fintech Sector to Face Rising

Oversight

Recently China’s top financial regulators,

including The People’s Bank of China (PBOC),

the China Banking and Insurance Regulatory

Commission, the China Securities Regulatory

Commission, and the State Administration of

Foreign Exchange, had a meeting with 13 of the

country’s biggest tech firms that offer online

financial businesses and warned over unfair

market practices. Firms required to attend

included Tencent, ByteDance and JD.com.

While praising the efficiency and inclusiveness of

the online financial platform in recent years, a

statement released by the PBOC pointed out

several widespread issues, including offering

banking and other financial services without a

license, inadequate corporate governance and

engaging in anti-competitive practices.

All 13 companies have been asked to conduct

comprehensive self-examination and rectification

of their businesses based on the following

requirements. First, all financial activities must be

licensed to operate. Second, the improper links

between payment tools and other financial

services must be disconnected and transaction

transparency needs to be improved. Third,

companies must have licenses to conduct personal

credit reporting. Fourth, regulators called for

strengthening shareholder qualifications, equity

structure, capital. Fifth, the firms need to improve

corporate governance and financial risk

management when making online loans and

investments. Sixth, the issuance and transaction of

asset securitization products and the act of listing

abroad need to be standardized. Seventh, officials

demanded to strengthen the financial consumer

protection mechanism by regulating the collection

and use of personal information and other

measures.

PBOC to Build up Its Fintech Cloud

Infrastructure

China’s central bank will accelerate the

development of its own fintech infrastructure,

which includes upgrading its data centres and

networks to link all central bank offices and

branches, along with building a "central bank

cloud" in 2021 to keep pace with the financial

industry that is increasingly being shaped by data

and artificial intelligence.

Last year, the PBOC registered two new fintech

companies. In July, it created a company called

Chengfang Fintech with 2 billion yuan (US$307

million) in registered capital. Then in October, it

founded Chengfang Financial Information

Technology, with 1.5 billion yuan in registered

capital.

The statement of building its’ own fintech cloud

infrastructure is another step in its strategy to

build a digital central bank, reflecting the

commitment to pushing ahead with its digital

transformation strategy.

Page 9: CHINA ECONOMIC WATCH

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KEY FIGURES AND TABLES

Sources: WIND, Bank of China

Global Commodity Prices and China

PPI (% Y/Y) Number of COVID Vaccinations

Per 100 People

Trade by Region

(Jan. & Feb. Ave., % y/y)

China’s Green Loans

11

14

17

20

6

8

10

12

2018-12 2019-06 2019-12 2020-06

Total balance of green loans (RMBtn, LHS)

Green loans growth (% y/y, RHS)

Other loans growth (% y/y, RHS)

-30

0

30

60

90

-30

0

30

60

90

2016 2017 2018 2019 2020 2021

Exports to the US

Exports to the Rest of the World

0

10

20

30

40

50

60

70

80

90

0

10

20

30

40

50

60

70

80

90

2021-01 2021-02 2021-03 2021-04

China

UK

US

Page 10: CHINA ECONOMIC WATCH

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KEY ECONOMIC INDICATORS

Industry sector 2020 2021

Apr. May Jun. Jul. Aug. Sep. Oct. Nov. Dec. Jan. Feb. Mar. Apr.

GDP (%, y/y) - - 3.2 - - 4.9 - - 6.5 - - 18.3

CPI (%, y/y) 3.3 2.4 2.5 2.7 2.4 1.7 0.5 -0.5 0.2 -0.3 -0.2 0.4 0.9

PPI (%, y/y) -3.1 -3.7 -3.0 -2.4 -2.0 -2.1 -2.1

-1.5 -0.4 0.3 1.7 4.4 6.8

Surveyed Jobless Rate 6.0 5.9 5.7 5.7 5.6 5.4 5.3

5.2 5.2 - 5.5 5.3

Fixed Assets Investment

(YTD, y/y) -10.3 -6.3 -3.1 -1.6 -0.3 0.8 1.8 2.6 2.9 - 35 25.6

Industrial Production

(y/y) 3.9 4.4 4.8 4.8 5.6 6.9 6.9 7.0 7.3 - 35.1 14.1

Retail sales (y/y) -7.5 -2.8 -1.8 -1.1 0.5 3.3 4.3 5.0 4.6 - 33.8 34.2

Manufacturing PMI 50.8 50.6 50.9 51.1 51.0 51.5 51.4 52.1 51.9 51.3 50.6 51.9 51.1

Non-manufacturing PMI 53.2 53.6 54.4 54.2 55.2 55.9 56.2 56.4

55.7

52.4 51.4 56.3 54.9

Export ($, y/y) 3.4 -3.2 0.5 7.2 9.5 9.9 11.4 21.1 18.1 - 60.6 30.6 32.3

Import ($, y/y) -14.2 -16.6 2.7 -1.4 -2.1 13.2 4.7 4.5 6.5 - 22.2 38.1 43.1

Trade Balance ($bn) 45.2 63.0 46.4 62.3 58.9 37.0 58.4 75.4 78.2 - 103.3 13.8 42.86

Industrial profits (y/y) -34.9 -4.3 6 11.5 19.6 19.1 10.1 28.2 15.5 20.1 - 92.3

Financial sector 2020 2021

Apr. May Jun. Jul. Aug. Sep. Oct. Nov. Dec. Jan. Feb. Mar. Apr.

M2 (y/y) 11.1 11.1 11.1 10.7 10.4 10.9 10.5 10.7 10.1 9.4 10.1 9.4 8.1

Aggregate Financing

(RMBtn) 3.1 3.2 3.5 1.7 3.6 3.5 1.4 2.1 1.7 5.2 1.7 3.3 1.9

Net New Lending

(RMBtn) 1.6 1.6 1.9 1.0 1.4 1.9 0.7 1.4 1.3 3.6 1.4 2.7 1.5

Foreign Reserves ($tn) 3.1 3.1 3.1 3.2 3.2 3.1 3.1 3.2 3.2 3.2 3.2 3.2

Loan Prime Rate – 1Y 3.85 3.85 3.85 3.85 3.85 3.85 3.85 3.85 3.85 3.85 3.85 3.85 3.85

Loan Prime Rate – 5Y 4.65 4.65 4.65 4.65 4.65 4.65 4.65 4.65 4.65 4.65 4.65 4.65 4.65

Cross-border RMB

settlement (RMBbn) - 527 - 595 538 - 532 634 - 602 467 631

FDI (y/y) 8.6 4.2 3.7 12.2 15.0 23.7 18.4 5.6 8.4 6.2

Sources: Bloomberg, Bank of China

*Notes: Recently released data is displayed in bold and italic

Page 11: CHINA ECONOMIC WATCH

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SELECTED FUTURE RELEASES

Date Indicator/Event Period Local Time Previous

14th

May FDI (%, y/y) May - 39.9

16th

May Fixed Asset Investment

(%, y/y) April 10:00 25.6

Retail Sales (%, y/y) April 10:00 34.2

Industrial Production (%, y/y) April 10:00 14.1

27th

May Industrial profit (%, y/y) April 09:30 92.3

Sources: Bloomberg, Bank of China

Page 12: CHINA ECONOMIC WATCH

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