The Big Ideas

'Global Cycle Notes: U-Turn': China
'Global Cycle Notes: U-Turn': China
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‘Global Cycle Notes: U-turn’

March 29, 2021
BIG IDEA | ‘A U-shaped recovery in the services sector beckons, but it’s still difficult to describe just what it will look like. No event in economic history compares, and the range of outcomes for wages, prices, employment, and financial markets is large.’
‘The unprecedented services recovery should not distract us from far less unusual - though turbocharged - dynamics in the global goods sector, which is likely to have a very strong year of its own.’
‘We expect global industrial production to grow three times faster than average in 2021, despite its having already drawn near the pre-pandemic trend. Industrial production momentum is likely to peak in late Q3.’
‘By then the services sector rebound in the US is likely to be in full swing, and a similar recovery, though aided by far less stimulus, is likely to be imminent in other developed economies. Clearly the inflation, wage, and interest rate dynamics this summer will be interesting as in-person services businesses race to re-employ enough workers to meet surging demand.’

CreditSuisse has just released ‘Global Cycle Notes: U-turn.’

  • The broad outlook beyond just China is above in the Big Idea.
  • Here is the China section.

‘The Chinese economy has slowed recently but should reaccelerate soon.’

  • ‘This year's industrial growth rate should be only modestly faster than the pre-pandemic trend, as the withdrawal of policy support will offset a steady recovery in domestic private demand and a strong upswing in external demand.’

‘Chinese manufacturers have the need and the means to increase investment.’

  • ‘Industrial production, exports, and corporate earnings have all surged recently, but the recovery in manufacturing investment has lagged behind.’
  • ‘Investment was subdued even before the pandemic due to trade war fears, deleveraging, and supply side reforms.’
  • ‘Capacity utilization has likely risen to high levels recently, boosting profit margins.’
  • ‘Chinese manufacturing PMIs moved lower in February for the third month in a row. Caixin manufacturing new orders stand 7 points lower than in November, at 51.0. NBS (official) manufacturing PMI new orders have also declined and stand at 51.5.’

‘Winter virus outbreaks and lockdowns have disrupted economic activity, although the burden has mainly fallen on the services sector.’

  • ‘As residents were encouraged to celebrate the Chinese New Year locally, long-haul passenger traffic slowed in the busiest traveling season’.
  • ‘Restaurant spending, home sales, and building starts have also fallen.’
  • ‘The impact on goods production has been lower due to online sales and extended holiday hours at factories.’
  • Nonetheless, PMI surveys have declined in recent months.’

‘Investment growth appears to have moderated, according to indirect indicators.’

  • ‘Infrastructure investment spending has slowed alongside special bond issuance, as the deceleration in financing continued this year.’
  • ‘Manufacturing investment is generally supported by strong corporate sales and profitability, but deposit data suggest a limited appetite for spending in recent months.’
  • ‘The balance of institutional demand deposits normally rises in a vibrant business environment, but it fell last month.’
  • ‘In our view, manufacturing investment has room to expand, since capacity utilization is likely high.’

‘Credit conditions will become less supportive to the economy as stimulus fades.’

  • ‘Credit-fueled growth last year has raised long-term sustainability concerns: the debt ratio jumped, the investment share of growth increased, and energy intensity climbed.’
  • ‘Policy is now likely to focus on long-term issues instead of boosting short-term growth.’

‘The government has set a 6% GDP growth target for 2021, far below consensus forecasts, which implies a high threshold for additional policy support.’

  • ‘A cyclical improvement in the economy will likely permit a gradual policy withdrawal this year.’

‘Household savings remain high, and further employment gains in services sectors should unleash some spending.’

  • ‘However, slow vaccine rollouts and persistent behavioral restrictions mean a longer path to full economic recovery than other major economies.’

‘Strong external demand will benefit China's export growth in the coming months.

  • ‘As a major hub for a diverse basket of manufactured goods, China is deeply embedded in the supply chains of consumer durables and business equipment.’
  • ‘Surging household income and a booming services economy in developed countries will likely boost goods demand and Chinese.’