By Xiong Yi
We at Deutsche Bank Research have revised up our 2021 GDP forecast for China from the previous 9.5 percent to 10 percent, because the stronger growth momentum in the fourth quarter of 2020 will likely continue in the first half of 2021, and the “blue sweep” in the US election will likely lead to stronger external demand.
Similarly, our colleagues have lifted up their 2021 forecast for the US economy by 2 percentage points in expectation of strong fiscal support. This will likely have positive spillover effects on the world economy, including China.
At this pace of growth, China’s economy could soon reach or even exceed its potential output. We believe China’s potential growth rate is currently at or slightly below 6 percent, and will likely drop further to around 5 percent in the next five to 10 years. This is likely also the view of policymakers: their long-term goal of doubling GDP by 2035 implies 4.7 percent average annual growth in the next 15 years.
Initially, the meeting of the Political Bureau of the Communist Party of China Central Committee in mid-December set the tone for policy normalization. However, the stance appeared to have softened somewhat at the Central Economic Work Conference, which was held one week later. According to the CEWC, macroeconomic policy should “ensure continuity” and “take no sharp turns” in 2021. Many observers debated the meaning of “no sharp turns”, with some asking whether it means policy normalization will be delayed to later in the year and others wondering whether the policy stance will be tightened from the beginning of 2021, even if not too rapidly. Based on additional information from the meetings of the Ministry of Commerce and the People’s Bank of China (the country’s central bank), we think “no sharp turns” likely means that both monetary and fiscal policy are on track to stimulus exit starting from early 2021.
The central bank’s policy objectives for 2021 have shifted to structural issues. It will continue to implement its policy tools introduced in 2020 to support the financing of small and medium-sized enterprises. It will also strengthen regulation and supervision on financial technology companies, including on payment, personal credit information, and financial product marketing.
Furthermore, promoting the green finance market has been set as a priority for 2021. As we have observed from the CEWC, the importance of climate action has been raised to a new level. The whole government, including the central bank, now shares the responsibility of implementing the climate policies.
We take the recent property loan tightening as a strong policy signal. For the first time, the central bank has introduced ceilings on the size of each bank’s property loans and mortgage loans. For the biggest banks, property loans will be capped at 40 percent of all outstanding loans, in which mortgage loans will be capped at 32.5 percent of total loans.
The ceiling will be lower for medium-sized banks, and even lower for small banks. Banks that currently exceed these ceilings are required to bring down their share in two to four years.
Moreover, we think it sends a signal that the economic risk balance has shifted in the central bank’s view.
The property sector is historically most vulnerable to overheating risks, and therefore has become the first target of the People’s Bank of China in its attempt to prevent economic overheating. Mortgage loans have constantly grown faster than other loan types in the past decade, with their share in total loans increasing from 12 percent in 2010 to 20 percent in 2020.
This year is likely to be the turning point, as mortgage loans’ share in total loans is expected to remain unchanged or even decline going forward.
The current low inflation is unlikely a constraint to monetary policy normalization. China’s headline consumer price index inflation turned negative year-on-year in November for the first time in a decade. But one should not look at monetary policy through a rear-view mirror. The low year-on-year inflation is largely a result of high food prices a year ago owing to a pork supply shock, and non-food price deflation during the lockdown in the first few months of 2020. Sequentially, nonfood prices have been rising in the past months.
More importantly, the labor market condition has tightened, and the unemployment rate is already back to normal levels. So we expect headline CPI inflation to soon turn positive and exceed 2 percent in the second half of 2021. The 2020 budgetary deficit was set at 3.6 percent of GDP, but the actual fiscal deficit－the difference between total fiscal revenue and spending－will likely exceed 8 percent of GDP in 2020. The difference will largely come from local government special bonds and the 1 trillion yuan ($154.81 billion) special central government bond issuance in 2020.
As such, we expect this year’s budgetary deficit to be reduced to 3 percent of GDP; local government special bond to be reduced from 3.75 trillion yuan in 2020 to 3 trillion yuan in 2021; and no more issuance of special central government bonds this year. We also expect the combined reduction in the fiscal deficit to exceed 2 percent of GDP, bringing the actual deficit to about 6 percent of GDP in 2021.
Local government borrowing will likely be constrained in 2021, which may slow down infrastructure investment and accelerate local State-owned enterprises’ restructuring.
The Ministry of Finance still hasn’t allocated any local government bond issuance quota for 2021, which is a deviation from previous years’ practice, as the ministry allocates some bond quota to local governments at the beginning of the year. We think this is likely a signal that local governments’ special bond quota will be reduced this year.
–The Daily Mail-China Daily News Exchange Item
