We believe the global COVID-19 pandemic will probably subside in 2021.
In this report, we analyze macroeconomic and policy outlooks from the
perspective of economic cycles and financial cycles. We think 2021 will be a
year of post-pandemic “rebalancing”. In our view, the rebalancing of economic
cycles will be reflected in demand creation by supply and concurrent global economic
recovery. Meanwhile, the rebalancing of financial cycles may take the form of
spontaneous credit tightening. We believe the macro financial environment will
be characterized by credit tightening, monetary easing, and fiscal expansion.
From the perspective of economic cycles, we expect demand to catch up with supply more quickly thanks to the multiplier effect. While COVID-19 acts as a typical supply shock, it transmits to the demand side and its impact on demand is amplified by the multiplier effect. As we expect COVID-19 to subside in 2021, we believe demand will catch up with supply more quickly thanks to the multiplier effect. Industry profits and employee incomes have diverged as the pandemic’s impacts vary across different sectors. As the widening wealth gap constrains demand, we believe the multiplier for demand growth when COVID-19 subsides is smaller than the multiplier for demand contraction during the pandemic outbreak.
From the perspective of financial cycles, we think credit tightening will emerge. In terms of money supply, much of the credit expansion in 2020 was to replenish inadequate operating cash flows rather than to finance productive investment. Thus, the rising debt service burden in the corporate sector may lead to endogenous credit tightening in 2021. Meanwhile, the financial cycle has been prolonged by further increases in housing prices, which was driven by credit expansion and the widening income gap amid the pandemic, as well as growing interest in investment-oriented real estate purchases in 2020. However, we believe the financial cycle may face downward pressure in 2021, especially the second half, as housing prices are already at historical highs while credit conditions may tighten. This may undermine demand growth, in our view.
We forecast that China’s YoY economic growth will reach a high level in 1Q21 before receding over 2–4Q21. We expect QoQ economic growth in 2021 to remain stable first and then edge down. We believe core inflation will rise, but lower pork prices may drag down headline CPI. We think China’s export momentum in 2021 may be weaker than in 2H20. Although we expect overseas supply to create more demand, we think Chinese exporters’ relative advantage in supply may decline. In the baseline scenario, we forecast China’s real GDP growth in 2021 may reach about 9% YoY. We expect YoY GDP growth to hit 19.5% in 1Q21 and then gradually recede to about 5.5% in 4Q21. Meanwhile, we project that QoQ GDP growth may edge down from about 1.4% in 1Q21 to about 1.3% in 4Q21. We estimate China’s YoY CPI and PPI growth at about 1% in 2021. Credit tightening calls for monetary easing. As credit expansion in response to COVID-19 in 2020 has prolonged the financial cycle, we think China will still need expansionary fiscal policies in 2021.