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China set for higher GDP growth in 2021 amid policy support, vaccine rollouts

The Chinese economy is on track to expand further in 2021 amid continued policy support and vaccine rollouts after a series of stimulus measures and early containment of COVID-19 helped the nation become the only major economy in the world to avoid a GDP decline last year.

China's GDP grew 2.3% in 2020. While the print was the slowest annual growth rate since 1976, it surpassed S&P Global Ratings' forecast of a 2.1% rise.

As the first country to bear the brunt of COVID-19, China rolled out a raft of policies in 2020 to combat the unprecedented economic shock from the pandemic, including hundreds of billions of dollars in investment-focused measures and liquidity-boosting moves from the country's central bank.

Chinese officials have vowed to avoid an abrupt policy shift and to maintain targeted support for certain sectors in 2021.

In addition, vaccines could slow the spread of the pandemic and help China's external demand recover faster this year, Iris Pang, ING's chief economist for Greater China, wrote in a Jan. 18 note.

GDP target practice

Shaun Roache, chief economist for Asia-Pacific at S&P Global Ratings, expects China's economy to grow 7% in 2021.

The nation could unveil an economic growth target when the National People's Congress convenes in March. Beijing regularly set its GDP target since 1990 until last year, when it abandoned the practice citing difficulties in assessing the impact of the pandemic.

"China is likely to unveil some type of growth target — it might be the midpoint of a range or a 'soft' target," Roache told S&P Global Market Intelligence. "However, where the target may land is more uncertain this year given the ongoing uncertainties of COVID-19 and the focus by the government on managing financial risk."

An official growth target closer to 8% poses upside risks to the economy, he added, as this would imply that more stimulus measures are underway. Such a target would also be in line with the World Bank and the International Monetary Fund's forecasts of a 7.9% expansion for the Chinese economy in 2021.

Economists at Oxford Economics expect policymaking in Beijing to be flexible and data-dependent this year, but they believe that overall policy will ultimately be tightened and lead to a shift in the fiscal stance from expansionary to contractionary.

Consumption catch-up

Private consumption is expected to stage a stronger rebound this year amid a rollout of COVID-19 vaccination programs, reviving China's transition to a consumer-led economy that was put on hold because of the pandemic.

"As the macro stance shifts, we see growth rotating towards consumption and corporate investment, away from infrastructure and real estate investment," wrote Tommy Wu, lead economist, and Louis Kuijs, head of Asia economics, at Oxford Economics in a Jan. 18 note.

Total retail sales in China fell 3.9% in 2020, mostly due to losses in the first half as COVID-19 dragged consumer demand lower. Sales recovered toward the end of the year, but Roache said "household confidence remains shaken and saving is still high."