Growth was stable in May. Industrial output rose 8.8% y/y, and increased 13.6% from May 2019, with an annualized growth rate of 6.6%. Investment rose 15.4% y/y, and increased 8.5% from May 2019, with an annualized growth rate of 4.2% y/y -- still in a low growth zone.

Consumption has recovered further. In May, retail sales of social consumption goods rose 9.3% y/y from May 2019, with an annualized growth rate of 4.5%, up 0.2 pps from April. Trade has been strong since the beginning of this year, especially for imports, which are growing robustly. In May, imports rose 39.5% y/y. Exports rose 18.1% y/y, down 4.1 pps from April, but still 7.1 pps higher than in Q4 2020.

Producer prices have been appreciating since Q2 2020, and are rising particularly fast this year, most likely from overseas monetary liquidity loosening. In May, the ex-factory price index of industrial output rose 9% y/y. The PPI growth rate reached 12.5% y/y. The growth rates of both were higher than their peak points in 2017 and 2010. In May, CPI rose 1.3% y/y. Although this growth rate is not high, the trend is forming, and picking up.

Monetary and financial indicators kept weakening in May. M2 rose 8.3% y/y. M1 rose 6.1% y/y, down 0.1 pps from April. Saving deposits from non-financial enterprises rose 3.8% y/y, down 1.5 pps from April, reaching their lowest growth rate since 2016.

China’s yuan has strengthened to a near three-year high, reaching 6.4 per dollar on June 21st, boosted by a falling dollar. It has also been buoyed in recent months by the country’s rapid recovery from the pandemic, and by a rush of international investment into China’s relatively high-yielding markets. Chinese stocks also jumped, thanks partly to a surge in foreign buying. A strengthening yuan will bring the current strong exports back to normal. The yuan might still appreciate further with China’s relatively tight monetary policy, in contrast to global monetary loosening, such as the almost zero interest rate in the United States. China’s tightening monetary policy is hardly likely to change, in the face of future global inflation spillover risk.

Growth is stable. Industrial output was up 9.8% y/y in April, and up 14.1% y/y from April 2019, with annualized growth of 6.8% y/y, the same as in Q1, and higher than the pre-pandemic levels in 2018 and 2019. Investment is still weak, and rose 8% y/y from April 2019, with an annualized growth rate of 3.9% y/y, up 1.3 pps from Q1. We expect economic growth to be strong, though fiscal and monetary policy are not loosening. Our forecast is based on strong trade growth from global economic recovery, commodity price appreciation and demand recovery.

Consumption recovered slowly. In April, price-adjusted consumption grew 5.4% y/y from April 2019, with an annualized growth rate of 2.7% y/y. Trade in April continues to be strong. Exports rose 22.2% y/y, up 11 pps from Q4 2020. Imports rose 32.2% y/y, up more than 20 pps from Q4.

Producer prices continue to grow faster. In April, the ex-factory price index of industrial output rose 6.8% y/y, and PPI increased 9% y/y, approaching the peak point in Q1 2017. CPI rose 0.9% y/y, up 0.5 pps from March. Most financial and monetary indicators grew more slowly. At the end of April, M2 rose 8.1% y/y, down 2 pps from the end of 2020. M1 rose 6.2% y/y, down 2.4 pps.

China’s once-in-a-decade population census, with preliminary results announced on May 12th, showed the slowest population growth rate since the 1950s, notwithstanding the relaxation of the one-child policy to a two-child policy in 2016. The census also showed that more Chinese people were moving away from the poorer northeastern part of the country, and to the wealthier eastern and southern regions. For example, Shenzhen and Guangzhou, already among the largest cities previously, gained the most, of 7.13 million and 5.98 million people. The migration to richer and more productive cities, made possible by the relaxation of Hukou, provides a key growth source, simply because labor can be utilized more efficiently.

GDP was up 18.3% y/y in Q1, and up 10.3% from Q1 2019, with an annualized growth rate of around 5%. In this report, we mostly use Q1 2019 as the benchmark period, because the major shock from the pandemic in February 2020 makes Q1 2020 data hardly comparable. The adjusted growth rate was lower than in Q4 2020, and higher than in Q3 2020, and can be viewed as stable.

In Q1 2021, industrial output was up 14% y/y from Q1 2019, with annualized growth of 6.8%, slightly lower than in Q4 2020. In particular, industrial growth in March reached 12.8% y/y, with an annualized growth rate of 6.2% y/y, up 0.4 pps from Q3 2020. In Q1, investment rose 25.6% y/y, and increased only 5.4% from Q1 2019, with an annualized growth rate of 2.6%, much lower than in H2 2020.

In Q1, retail sales of social consumption goods rose 33.9% y/y, and were up 8.5% from Q1 2019, with an annualized growth rate of 4.1%, indicating that consumption is still on its way to recovery. In Q1, imports rallied, and grew 19.2% y/y, up 19.3 pps from Q4 2020. Exports increased 16.5% from Q1 2019. The adjusted growth rate is comparable to H2 2020, and is at high levels for recent years.

In Q1, producer prices continue to increase, and the growth rates are high. In March, the ex-factory price index and PPI saw growth reach 4.4% and 5.2% y/y, up 4.8 pps and 5.2 pps from December 2020. This is mainly driven by strong demand for commodities from other countries’ economic recoveries. CPI is instead basically stable. Money and financial indicators grew more slowly. At the end of March, M2 was up 9.4% y/y, down 1.5 pps from its peak last year. M1 was up 7.1% y/y, and has decreased 2.9 pps over four consecutive months.

Postponing the retirement age will be on the Chinese government’s agenda, according to announcement made March 22nd, with further details released on April 13th. China’s aging problem is severe, and population growth is on a steep declining trend, and has attracted great attention. The takeaway from the statement on postponing retirement age is that the delay is to be gradual, and experimental. It will alleviate the negative effects of slower population growth. Population aging and slower growth mainly negatively affect GDP, but not necessarily in per capita terms, due to China’s high savings rate, and financially rich central government.

Economic recovery is still going strong. In January-February, industrial output was up 35.1% y/y, and up 16.9% compared to January-February 2019. Annualized growth was 8.1% y/y, higher than all quarterly growth since 2015, and up 1 pps from Q4 2020. Since the Chinese economy was shut down to a large extent last February due to COVID-19, we also look at growth rates for most indicators by comparing their performance with the same period in 2019.  

In January-February, investment fell -35% y/y, and was up only 3.5% y/y from the same period in 2019. The investment slowdown is mostly due to the central government’s intention to cool the economy.

Trade is strong, as we forecast. In January-February, exports were up 50.1% y/y, and increased by 26.2% from same period in 2019, and up 9 pps from Q4 2020. Imports were up 14.5% y/y. The adjusted growth rate was around 12% y/y, up 12.1 pps from Q4.

Producer prices rose faster. In February, the ex-factory price index of industrial goods was up 1.7% y/y, and up 1.4 pps from January. The PPI was up 2.4% y/y, and up 1.5 pps from January. The CPI fell -0.2% y/y, up 0.1 pps from January. Monetary policy has returned to normal. At the end of February, M2 was up 10.1% y/y, the same rate as the end of last year, and down 1 pps from the peak last year. M1 rose 7.4%, down 2.6 pps from the peak last year, and it has declined rapidly since November.

Consumption is the only weak indicator. In January-February, retail sales of social consumption goods were up 33.8% y/y, up 6.4% from same period in 2019, and up 1.8 pps from Q4 2020, indicating consumption demand is still on a path of recovery.

On March 23rd, Premier Li Keqiang said that China’s economic growth this year could exceed a target of “above 6%,” with the government seeking stable expansion and job creation, emphasizing consumption. Consumption inequality, which is closely related to income and wealth equality, rose last year. With the premier’s effort and return to normal monetary policy, we believe consumption as well as the much-related imports will rise this year.

Author: Xiao Geng, Chairman of the Hong Kong Institution for International Finance, and Professor of Peking University HSBC Business School

Editor’s note: During the launch of Global Financial Centres Index 29 on March 17, 2021, Professor Xiao Geng spoke about the global financial scene and the financial connections within the Guangdong-Hong Kong-Macao Greater Bay Area (GBA).

On the greatest opportunities and challenges facing the global economy and finance in 2021

2020 was an extremely tough year for both China and the United States. China withstood the test of the pandemic and the US-Sino trade conflict, while the United States also went through the pandemic as well as election chaos and social problems induced by political division. If the social, economic, and financial conditions of either of these two countries continue to deteriorate, it will be detrimental to both the global economy and to global finance.

In the next few months, China and the United States will continue to negotiate. Competition is inevitable between the two countries, but the confrontation needs to be managed and controlled. Meanwhile, the two nations should continue to cooperate on dealing with climate change and the COVID-19 pandemic, as well as regional and global governance issues. Professor Xiao believes that the biggest challenge of 2021 willbe to explore new, more complex, and more pragmatic ways for the super-powers to cooperate, compete and coexist. He also believes this will be the new normal and the basis for the future world’s peace and prosperity.

On how the global economic and financial risk structure has shifted

The monetary policy of United States is widely thought to be irresponsible, including the fiscal expansion policy supported by zero interest rates and printingmoney. Professor Xiao proposes that there are two sides to this story. This policy has given the U.S. economic and social stability, which has benefitedboth the U.S. and the rest of the world. However, it also causes significant uncertainty for the U.S. financial market, as well as the global financial market, as the value of assets theoretically cannot be determined with zero interest rates. Asian countries in particular should be prepared as they will be on the forefront of any global financial market turbulence, because theyhave the most foreign exchange reserves and their currencies are closely linked to the U.S. dollar.

On how inflation expectations will be influenced

Regarding inflation expectations, it is important to distinguish between asset price and consumer price. The consumer price index (CPI) is expected to be controllable in 2021, partly because of China’s great impact on the price of products manufactured globally. Compared to other countries, China’s supply capacity is less affected by the pandemic and has even been improvedvia supply-side structural reforms. China thus has a defining effect on the price of global manufacturing products.

Furthermore, the CPI may not necessarily reflect inflation expectations. Inflation is mainly reflected by the revaluation of assets. China’s net wealth has increased much faster than its GDP growth over the past few yearsbecause China’s marketization has led to asset and exchange rate appreciation. This trend is in line with economic laws. However, it should be noted that some assets have not increased in value.The market decides the value of an asset. The valuation of some high-quality assets thus rose while other fell, including the valuationsof real estate and stocks. The funds released by COVID-19stimulus and relief measures were more likely to flow to high-quality assets. High-quality assets around the world have therefore been revalued, including those in the United States and China. It is therefore important to have a clear understanding of the market, and to revalue the assets in conformity with market trends.

On the development of GBA financial ecosystem

It is important to move quickly to explore how Hong Kong’s mature offshore financial system and the overall ecosystem can be extended to GBA, as this is a time-sensitive issue. This innovative approach, based on the “one country two systems” principle, will allow Hong Kong’s primary financial institutes and enterprises to operate under local supervision using Hong Kong’s common law and currency within the GBA trial zones. It will also be instrumental to overcome the protection towards industries and monopoly seen in Hong Kong, as well asto make up for its limited physical space and market. Further research is thus required into the connectionbetween Hong Kong and Shenzhen markets with the goal of building a unified market in the GBA.

Professor Xiao suggests that, as the conduit of “internal circulation” and “external circulation”, Hong Kong’s strength in market and economic openness should be combined with the GBA’s advantages in market scale, production resources and its local government’s ability to coordinate resources and centralize execution. Although Shenzhen and Hong Kong compete with each other as financial centres, the two are within the same financial cluster equipped with two distinct functions – offshore and onshore. Both functions require a unified and interconnected market so that maximum efficiency of fund, talent and land usage can be achieved. Nevertheless, offshore and onshore functions need to be separated to avoid any financial or systemic impact that the two cities could have on each other. Professor Xiao argues that this is now indeedfeasible with existing financial supervision technology.

Producer prices increased fast between June 2020 and January 2021, and finally turned positive. The ex-factory price index of industrial goods rose 1% m/m, and 0.3% y/y. PPI rose 1.4% m/m, and 0.9% y/y. We expect the ex-factory price index to soon rise higher than 5% y/y, and PPI will rise higher than 8% y/y.

CPI fell -0.3% y/y. However, its seasonally adjusted growth rate was 0.3% m/m. The rise of the CPI level is mainly driven by the strong rebound of meat prices. The rebound is temporary, and linked to the Spring Festival effect. We expect the meat price will continuously drop for the next few months, and for CPI growth to slow as well.

Monetary and financial indicators cooled further. In January, M2 rose 9.4% y/y, down 0.7 pps from December. M1 rose 14.7% y/y, and 10% y/y after taking out the Spring Festival effect. RMB loans from financial institutions rose 12.7% y/y, down 0.1 pps from December. Savings deposits from non-financial institutions rose 15.8% y/y and deposits’ adjusted growth rate was lower than 12% y/y. Because the broad money supply was not affected by the Spring Festival effect, their growth rate declines show that the overall money and financial situation continue their declining trend.

PMI fell. In January 2021, PMI was 51.3%, down 0.6 pps from December 2020. The non-manufacturing business activity index was 52.4% y/y, down 3.3 pps from December. The two indexes show that expansion trends for both manufacturing and non-manufacturing industries have slowed.

Chinese exports have been strong since 2020. For example, China overtookthe United States as Europe’s top trade partner in 2020. Even though pandemic-related goods comprise a sizable share, other categories’ exports are also rising. Strong export growth, with production interruption in the rest of the world because of the pandemic, shows China’s economic resilience. The resumption of overseas production, if the pandemic is under control, will lift Chinese exports of capital and intermediate goods. Moreover, the import demand from the United States had been strong since 2020, and will likely be large, given the incoming stimulus. In sum, robust export performance will persist, and we expect export growth in the first half of 2021 to be 16%.