China: Strong growth, self-reliance and a new US-China path

Strong finish to 2020

Five-Year Plan to focus on self-reliance, innovation and stronger domestic market Strong finish to 2020 China is ending 2020 on a strong note economically. PMI indicators for both manufacturing and services are at high levels, profit momentum is robust and export growth reached a 10-year high in November (if disregarding the occasional spikes you see around the Chinese New Year).

The CNY has continued to strengthen against the USD, but it is as much a story about USD weakness as CNY strength. Lately CNY weakened a bit against the EUR and the trade weighted CNY is less than two percent above the average of the past five years (chart 3).

Comment: The strength in Q4 has been even stronger than we had expected. One explanation seems to be that the global manufacturing recovery has strengthened further in Q4, despite new COVID-19 related restrictions in US and Europe. However, we still look for growth and PMIs to peak in Q1 2021, as the catch-up effect following the plunge in Q1 starts to fade and stimulus is likely to start to dwindle during 2021. The latter is already indicated by slower credit growth (chart 2). We look for CNY to strengthen further against the USD due to monetary policy divergence and we have a 12-month target of 6.40.

US-China relations to remain tense under Biden

Altinfrastructure and education to better compete with China – and not just complain about it. Both Democratic and Republican senators have draft bills for such a strategy. Biden mentioned energy, biotech, advanced materials and AI as areas ripe for government investments.hough President-elect Joe Biden will bring a big change in style to the White House and will be less erratic than President Donald Trump, the Democrats generally share the grievances over China and a continued tough stance is set to continue. In an interview with New York Times, Biden highlighted two points:

Build an alliance to confront China. "The best China strategy, I think, is one which gets every one of our — or at least what used to be our — allies on the same page. It's going to be a major priority for me in the opening weeks of my presidency to try to get us back on the same page with our allies."infrastructure and education to better compete with China – and not just complain about it. Both Democratic and Republican senators have draft bills for such a strategy. Biden mentioned energy, biotech, advanced materials and AI as areas ripe for government investments.

Industrial policy investing in US tech. It is all about leverage "and in my view we don't have it yet". According to the article, part of getting leverage is developing a consensus of government-led investments in American research and development,infrastructure and education to better compete with China – and not just complain about it. Both Democratic and Republican senators have draft bills for such a strategy. Biden mentioned energy, biotech, advanced materials and AI as areas ripe for government investments.

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