SINGAPORE, June 10, 2021 – After the COVID-19 pandemic inflicted a sharp contraction in the first quarter of 2020, China’s economy has shown remarkable resilience and staged a strong comeback. Effective containment measures, sound macro fundamentals, strong solidarity among the people, as well as decisive and targeted policy measures are factors that set the swift recovery in motion. The recovery momentum strengthened through successive quarters between the second quarter of 2020 and the first half of 2021, and is likely to be sustained through this year. This would allow China to step up efforts to address structural challenges. This is according to the 2020 Annual Consultation Report on China published by the ASEAN+3 Macroeconomic Research Office (AMRO) today. (The report was prepared based on AMRO’s Annual Consultation Visit to China in late 2020, and data and information available up to 31 December 2020.)
Recovery and Growth
Following a steep 6.8 percent year on year contraction in the first quarter, China’s economy rebounded strongly and grew by 2.3 percent in 2020, led by the industrial sector. Growth accelerated further to 18.3 percent year on year in the first quarter of 2021, reflecting both base effects and continued firming of the economic recovery. Exports and demand for manufacturing goods have been remarkably strong in a recovering global economy. Coupled with resilience and steady recovery in several segments of the services sector, China has seen a strong employment recovery. Although hard-hit micro and small enterprises are recovering at a slower pace than larger enterprises, the recovery is well underway.
Looking ahead, the economy is expected to grow by 8.7 percent in 2021, supported by a strong rebound in the global economy, especially the US and Europe, boosted by the rapid rollout of vaccines in those two regions. China’s exports are likely to remain strong driven by demand for manufacturing products, especially electronics and biomedicals. The rapid rollout of vaccines and achievement of herd immunity will allow for a fuller opening of the economy, including cross-border travel, and lead to a stronger services sector. Consumption will be the main growth driver in 2021, as households are likely to reduce precautionary saving and spend more. Other factors behind the expected strong growth include continuing policy support for vulnerable households and firms, rapid development of the digital economy, and industrial upgrading.
Risks and Vulnerabilities
The economy continues to face several risks to growth and stability. Recurring waves of COVID-19 infection could jeopardize the ongoing recovery of the global economy and could weigh on China’s external-oriented sectors, resulting in a bumpier recovery and higher unemployment in related sectors. Some city and rural commercial banks could face loan portfolio deterioration if economic and financial conditions were to weaken, compelling them to bolster their capital buffers. Small banks, other financial institutions and local government financing vehicles, which are interconnected, might experience spillover risks. Likewise, financial strains among highly-leveraged real estate developers and weaker state-owned enterprises could occur, affecting confidence in their respective sectors.
Chinese authorities recognize that these risks and vulnerabilities necessitate the continuation of targeted fiscal measures to sustain a more balanced and inclusive recovery; and a firmer but still accommodative monetary policy stance to ensure that liquidity is adequate and supportive of credit growth. They are also mindful that the phasing-out of stimulus policies should be done cautiously, taking into account both domestic and external risks and uncertainties. Efforts are underway to coordinate the design and sequencing of the overall phasing-out strategy, and to avoid cliff effects in 2021. Given the existing policy space, there is room for policy support to be stepped up, where warranted.
In an unusually challenging year, the Chinese authorities have demonstrated strong policymaking acumen and successfully addressed multifaceted challenges arising from the pandemic. This has placed China in a strong position to bolster its economic resilience in the post-pandemic era. In particular, additional efforts will be needed in several areas. These include: i) curbing excessive increases in debt; ii) continuing reform of state-owned enterprises; iii) strengthening the social safety net for vulnerable workers and households; and iv) improving the effectiveness of the framework and mechanisms to support micro and small enterprises.
For long-term developments in the decades ahead, the recently proposed “dual circulation” development strategy will enable China to further transform its economy. The strategy comprise two key pillars: (i) leveraging the domestic market and enhancing capability and capacity through developing indigenous and innovative technology, and (ii) strengthening external linkages to build connectivity and markets. The Chinese authorities are encouraged to take into consideration the implications for regional economies and to remain committed to rules-based multilateral trading system.
The ASEAN+3 Macroeconomic Research Office (AMRO) is an international organization established to contribute towards securing macroeconomic and financial stability of the ASEAN+3 region, comprising 10 members of the Association of Southeast Asian Nations (ASEAN) and China; Hong Kong, China; Japan; and Korea. AMRO’s mandate is to conduct macroeconomic surveillance, support the implementation of the regional financial arrangement, the Chiang Mai Initiative Multilateralisation (CMIM), and provide technical assistance to the members.
About AMRO’s Annual Consultation Report
The Annual Consultation Report was prepared in fulfillment of AMRO’s mandate. AMRO is committed to monitoring, analyzing and reporting to its members on their macroeconomic status and financial soundness. It also helps identify relevant risks and vulnerabilities, and assists members, if requested, in the timely formulation of policy recommendations to mitigate such risks.
Assistant Head of Communications, AMRO