‘We expect GDP growth to improve to 7.1% in 2021 from 2.2% in 2020.Realized growth will likely overshoot potential growth in 2021, but from a policy perspective, we expect that the authorities would prefer to avoid an aggressive overshoot in one particular year in exchange for a smoother and more sustainable growth profile over the next five years.’

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‘The Chinese economy is coming out of the pandemic slump earlier than other economies, but the recovery has been uneven.’

• ‘Starting in Q320, production-side indicators have been rebounding faster than expenditure-side indicators.’

‘There has however been a noticeable unevenness on the expenditure side.'

• ‘The infrastructure and real estate sectors have disproportionately benefited from the stimulus, while in contrast, private manufacturing, services, and parts of the household sector have lagged due to fragmented credit allocation mechanisms.’

‘We anticipate the divergence between production and expenditure-side indicators to fade going into 2021, a process that recent indicators suggest is already underway.’

• ‘The fashion of the convergence is expected to rely more on the acceleration of the expenditure-side recovery, but it will also include a moderation to production momentum.’

‘Even with anticipated growth of 7.1% in 2021, the risk is actually skewed to the upside.’

• ‘For the unevenness within the expenditure side, we anticipate manufacturing fixed-asset investment (FAI) growth, which has been lagging other FAI components, to catch up (Figure 46, above).’
• ‘In addition, we also expect the ongoing rebound in services consumption to continue as disposable income growth recovers (Figure 47, above).’

‘With the recovery already underway, a GDP growth overshoot in 2021 appears inevitable.'

• ‘From a policy perspective, we expect that authorities will likely avoid a pro-cyclical policy stance and, to the extent possible, rein in the overshoot in 2021.’
• ‘They would most likely prefer to avoid an aggressive overshoot in one particular year in exchange for a smoother and more sustainable growth profile over the next five years.’

‘Specifically, we expect a moderation to M2 growth on the monetary front from 10.4% in 2020 to 9.3% in 2021.’

• ‘On the fiscal front, we expect a tighter fiscal stance.’
• ‘The one-time COVID-19 treasury issuance, which accounted for about 1% of GDP, will almost certainly not be repeated in 2021.’
• ‘Special purpose bonds will remain, but we expect their annual quota to decrease by roughly half a percentage point of GDP relative to that of 2020.’
• ‘There will likely also be modest downward adjustments to the official fiscal deficit target of about 0.3- 0.5% of GDP in 2021 relative to the 3.6% target in 2020.’
• ‘Abstracting away from any multiplier effect, the fiscal drag in 2021 relative to that of 2020 would be approximately 2% of GDP.’

‘To be clear, even with the tightening policy stance, overall GDP growth and its various key components are still expected to have above-trend growth in 2021.’

• ‘For example, we expect real estate investment (REI) to grow by 6.5% in 2021, faster than the anticipated growth rate for 2020 (4.1%) but slower than pre- COVID-19 growth in 2019 of 10.0%.’
• ‘REI growth in 2020 will likely fall below the implied growth rate based on macroeconomic factors such as M2 growth and house price inflation, predominantly attributed to the COVID-19-induced contraction experienced in Q120.’
• ‘Hence, despite the anticipated slowdown to M2 growth in 2021 and authorities’ ongoing effort to curb house price inflation, we expect REI growth in 2021 to be higher than the implied growth rate normally associated with such macro conditions.’

‘We revised our expectation for 2021 headline CPI downward, from 2.5% yoy to 1.1% yoy, mainly due to pork deflation.’

• ‘After looking at sequential price momentum instead of year-over-year numbers, which are distorted by the base effect, we believe that headline CPI is about to enter a reflationary cycle.’

‘As China continues to reduce its production-expenditure rebound gap, there might be a modest improvement to core inflation.’

• ‘We do not think that the PBoC will react to the disinflation in CPI with a more accommodating monetary stance.’
• ‘For the same reason that the PBoC did not tighten when pork drove up inflation during 2019, it will most likely not respond to pork-driven disinflation.’

‘As per the exchange rate, the CNY is expected to experience additional appreciation over the coming 12 months.’

• ‘We forecast USDCNY to reach around 6.3 by the end of 2021.’

‘Moving beyond 2021, we anticipate three key policy categories to be emphasized in the next five-year plan:’

1. ‘Technology Advancement. The technology category encompasses the ongoing efforts to establish “new infrastructure,” innovate and enhance capabilities in the key strategic sectors, and secure essential inputs.’
2. ‘Labor Productivity. The labor category aims to increase labor productivity, including labor market reforms to facilitate labor movement, educational reform to improve the quality of the labor force, and a further opening of Chinese markets to foreign participation and competition.’
3. ‘Land Reform. Finally, the land reform category aims to clarify land usage rights and the transfer of usage rights.’

• ‘The scope of this reform would cover at least farmland and land used for residential and commercial properties.’
• ‘Land reform will directly affect the pace of urbanization, which in turn would provide ongoing support to sectors such as real estate and traditional infrastructure in avoiding cliff-like decelerations.’

‘Finally, we view China’s participation in the recently signed RCEP as a positive development for multilateralism and trade within the region.’

• ‘This should also slow down the decoupling forces between China and the rest of the world.’