Chinese Q4 GDP Preview: Economic growth back to pre-pandemic levels?

  • China’s economy to show solid expansion in Q4 but not out of the woods yet.
  • Factory sector moderates amid the second COVID-19 wave on the external side.
  • Retail spending to rise for the fifth straight month in December. 

The comeback from the coronavirus crisis-induced damage is nothing short of spectacular, as the Chinese economic growth is seen returning to pre-pandemic levels in the final quarter of 2020. Thanks to a strong fiscal and monetary policy response, China is expected to be the only Group of 20 countries to record positive growth in 2020.

After a record contraction in the first three months of last year, China’s economic turnaround could be largely attributed to state-led investment in infrastructure, stringent virus controls and demand for medical exports and lockdown goods in the US and Europe, which are still fighting a prolonged battle to curb the virus surge.

The world’s second-largest economy contracted 6.8% YoY in Q1 2020. However, it bounced back to a record an expansion of 3.2% in Q2 and 4.9% in Q3. For the fourth quarter of 2020, China’s Gross Domestic Product (GDP) is expected to grow by 6.1%

On a quarterly basis, the Chinese economy is likely to expand 3.1% in Q4 after registering a 2.7% growth in the previous quarter.

Source: FXStreet

The People’s Bank of China (PBOC) implemented numerous measures, including open market operations, standing lending facility, central bank lending, and central bank discount, to provide sufficient liquidity to the market, which helped the economy stage an impressive V-shaped recovery.

However, it remains to be seen if China can extend the same recovery momentum in 2021. The International Monetary Fund (IMF) cut its 2021 growth projection for the Chinese economy. The Asian economic giant is now projected to grow by 7.9% this year when compared to its previous estimate of 8.2% growth made in October, the IMF said.

Alongside the critical GDP release, the dragon nation is set to publish its activity numbers, throwing fresh light on the consumption and production aspects.

Industrial output and retail sales in focus

Industrial output is likely to have increased by 6.8% YoY in December when compared to a 7% rise seen in November.

The moderation in the industrial output is expected, thanks to the weakening expansion in the factories while they continue its recovery momentum.  China’s official manufacturing purchasing managers’ index (PMI) fell to 51.9 in December from 52.1 in November. Meanwhile, The Caixin/Markit Manufacturing Purchasing Managers’ Index (PMI) fell to 53.0 from November’s 54.9.

Amid seasonal domestic factors, a decline in the external demand is also likely to be a key factor behind the modest slowdown in the Chinese factories. Europe and the UK entered fresh lockdowns in the fourth quarter of 2020, which may cause a drag on the Chinese output.  A return to virus restrictions in China’s biggest markets fuelled demand for medical equipment and work-from-home electronic devices.

Meanwhile, the December Retail Sales are seen higher at 5.5% on an annualized basis vs. November’s 5% growth. Consumer spending appears to remain strong after November’s retail sales were boosted by the ‘Singles’ Day’ shopping festival.

“The retail recovery is on track and consumption will remain the main growth engine,” a spokesman for the National Bureau of Statistics (NBS) said.

Market reaction

Although the accuracy of official Chinese economic data has always been questioned, given the lack of transparency on how it is generated, the rebound is likely to have a significant impact on the markets.

A stronger-than-expected headline GDP number is likely to lift the overall market sentiment, driving riskier assets higher. Global stocks are expected to cheer a robust expansion in the Chinese economy, with the domestic stocks and US equity futures seen benefiting the most.

Disappointing growth numbers could call for more stimulus efforts from the PBOC and government, keeping the declines limited in the stocks and Chinese proxies such as the Australian dollar and the kiwi. China is the top trading partner for the OZ economies.

Markets will also watch out for the activity numbers, including the industrial output and retail trade, in order to gauge the strength of the economic recovery, which could potentially have wider implications for risk trades.

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