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Article04 May 2021

China Economics: A Switch in Growth Engines

Citi Global Insights summarizes economist Xiangrong Yu’s outlook for China’s economy for the rest of the year, in particular relating to the likely engines of growth and the risks from policy tightening and uncertainties in the US-China relationship. Post a 1Q in which China’s real economic growth seemed to moderate relative to the previous quarter, Xiangrong expects the economy to be increasingly driven by domestic consumption and industrial capex.

While China’s exports and property investment were relatively resilient in 1Q21, Xiangrong Yu sees them fading as key drivers of economic growth. Exports might benefit in the short term from a demand upturn triggered by major stimulus programs in the US, but the one-off support from pandemic-related disruptions globally will taper as widespread vaccinations allow the resumption of normal production in some economies. Property investment faces dual headwinds, most likely in the second half of the year, from a tightening in credit availability and more stringent housing policies.

Xiangrong expects consumption and industrial capex to take over as China’s main engines of economic growth. Consumption should benefit from pent-up demand and rising income growth on an improving labor market, while more pervasive vaccination levels should allow a catch-up in consumer services. An upcycle for industrial capex would be supported by industrial reflation and improving industrial profitability.

Both money and credit growth rates slowed visibly in March, suggesting that the policy exit is already underway. In addition, the head of the PBoC’s Financial Stability Bureau signaled in a speech that further regulation is ahead for the financial sector, once the economic has firmly recovered. Such regulatory tightening would exert extra pressure on financial conditions. However, abrupt changes in policy seem unlikely. As Xiangrong puts it: ‘We think the PBoC would exert extra caution in its policy exit agenda in 2Q21E, for concerns on financial stability, especially when the credit market is wary of the default risk of a large centrally owned AMC.’

In terms of external economic risks, the tariffs introduced by former US President Trump still represent uncertainties to trade, investment, technology and ultimately growth. Overall, the US-China relationship seems to be improving in some areas, deteriorating in others.

For more information on this subject, please see China Economics: Growth Surges with the Shift in Drivers


Citi Global Insights (CGI) is Citi’s premier non-independent thought leadership curation. It is not investment research. The comments expressed herein are summaries and/or views on selected thematic content from a Citi Research report. For the full CGI disclosure, click here.

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