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Spotlight on China's Growth

I do not expect negative growth, rather a slowdown in growth. Here are some competing views.

Marco Polo China

  1. My take on how Chinese economy will going to perform in 2021 @MacroPoloChina . The main theme is that 2021 growth will be shaped by policy tightening vs consumption recovery.
  2. Growth target will likely be 5% in 2021, meaning Beijing will not do much to help growth. Meanwhile, addressing risks such as local government debt and property overheating are back on the agenda, and current growth drivers such as fiscal spending and property will be stifled.
  3. Yet, recovery will eventually pick up steam in the second half as the labor market improves and consumption strengthens. This is because there still exists substantial potential for consumption to rebound.
  4. At first look, as growth has already surpassed pre-Covid level in the last quarter, it seems an exaggeration to say there remains large potential. Yet, besides recovering from Covid, the Chinese economy is recovering from the economic slowdown in 2018-19.
  5. Labor market had already been below full employment before Covid, and lost additional jobs in 2020. Cumulatively, ~10 million ln jobs lost since 2018. Because of weak job market, households saving rate is elevated, which has hindered consumption recovery so far.
  6. Despite lack of policy support, we believe labor market will continue to improve, as China’s labor market has demonstrated remarkable ability to self-heal. For example, in 2019, despite no growth rebound in 2019, migrant employment growth actually accelerated.
  7. Although policy tightening will cause slowdown in 1H, overtime, continued labor and consumption recovery will help growth to regain momentum in the second half. Chinese economy will likely see a shallow V-shaped growth in 2021

China's Migrant Labor Market 

China's Migrant Employment

That chart accompanied  Tweet #5 above.

Michael Pettis Views on Chinas Growth

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Pettis estimates 6%-7% which surprises me. I would have guessed Pettis the same as Houze Song.

Song and Pettis

Thanks to Michael Pettis and Houze Song for the discussion.

What Does China Want?

I believe that is the key question. If China wants 6% it will find a way to pull that off, even if it is a gross distortion of reality.

The risk is the same as always. To achieve growth at any cost China will allow property bubble expansion and lean on State Owned Enterprises (SOE) for growth. 

If so, much of the growth will again be malinvestment, with the payback down the line. 

Malinvestment adds to perceived growth now but later writeoffs will subtract from future growth.