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China 2021 GDP to beat target on COVID bounce: Nikkei survey

Economy expected to surpass US as top economy in early 2030s

Analysts are watching if vaccination delays in China would disrupt production and dampen consumption. People sit at a vaccination site after receiving a dose of a COVID-19 vaccine in Shanghai, January 19, 2021.   © Reuters

HONG KONG -- China's economy looks to expand 17.9% for the January-March quarter, a growth figure inflated by the coronavirus-related crash in the year-ago period, a survey of 32 economists by Nikkei and Nikkei Quick News finds.

The economists predict 1.0% growth on a seasonally adjusted, quarter-on-quarter basis for the first three months of 2021, as momentum slows from a 2.6% gain in the fourth quarter of 2020.

Two-thirds of the economists also think China will overtake the U.S. to become the world's largest economy sometime between 2030 and 2034, benefiting from its containment of the COVID-19 pandemic.

Growth estimates for the first quarter of 2021 range from 12% to 20.8%. Of the 24 valid responses, 19 economists expect a rate of 18% or more including Aidan Yao, senior emerging Asia economist at AXA Investment Managers, who forecast 18.8% growth.

The high growth rate largely reflects the low base set in the first quarter of 2020, Yao said, when gross domestic product shrank 6.8% during the peak of the COVID-19 outbreak in China.

Sequentially, the January-March growth "should decelerate relative to Q4 due to the impacts of the virus resurgence and the associated tightening of social restrictions," he said, as China's production boost was not enough to offset the harm to investment and consumer spending.

Tommy Wu, lead economist at Oxford Economics, forecast 19.3% growth for the first quarter and agrees that this figure reflects a rebound from last year's downturn. He expects quarter-on-quarter growth of 0.2%.

"While industrial production remained robust in January-February, supported by strong export demand, the momentum in fixed asset investment and household consumption fell amid travel restrictions and caution during the Chinese New Year holidays," he said.

But with a full-year forecast of 8.9%, Wu is optimistic that robust growth momentum will resume after the first quarter as the recovery in travel and logistics helps Chinese household consumption gain strength.

All economists in the survey forecast GDP growth topping 6% for 2021, the goal set by China at the National People's Congress in March. Their full-year GDP estimates average 8.5%, up from 8.2% in the survey conducted during December.

Strong global demand for pandemic-related and electronic products will continue supporting China's manufacturing sector and exports, said Bank of East Asia economist Celia Lam, who forecast full-year growth of 8.6%.

"The well-controlled pandemic within China will uplift the consumer and business sentiment, underpinning the consumption and investment," she said.

Samuel Tse, economist and strategist at DBS Bank, forecasts 10.5% growth for 2021 -- the highest among those in the survey -- and thinks a strong global recovery will boost China's industrial production and exports from the second quarter onward.

But JD Technology Group chief economist Shen Jianguang, who gives a more reserved forecast of 8.4%, said China's recovery still faces difficulties from structural imbalances among industries, regions and companies of different sizes.

Most of the economists cited "vaccination delays or new COVID outbreaks" along with "debt crunch and soured loans for banks" as the major risks for China's economy this year.

Moody's Analytics economist Christina Zhu thinks new COVID outbreaks and vaccination delays would disrupt production and dampen consumption.

"Slow vaccination will delay travel and the recovery of the services sector, threatening to destabilize employment and income prospects, and thus hurting consumer confidence," she said.

China already faces problems tied to nonperforming loans and debt caused by supportive business policies, and credit defaults will continue this year, said Cheng Shi, chief economist at ICBC International.

Wei Yao, chief Asia and China economist at Societe Generale, echoed Cheng's view and said bond defaults could bring tighter credit conditions, which would hinder growth.

But Kevin Lai, chief economist for Asia ex-Japan at Daiwa Capital Markets, calls trade tensions and company sanctions the top threat for China's economy this year. President Joe Biden's administration is eager to show continuity on U.S. policy toward China, with a stronger coalition among traditional strategic allies in Europe and Asia.

"Investors should be prepared to see a further escalation after Alaska," Lai said, citing the recent combative meeting there between U.S. and Chinese diplomats. "Following new sanctions on Hong Kong, Washington looks poised to follow through with more action on a wide range of issues, especially when it has most likely reached a consensus with its allies."

Arjen van Dijkhuizen, senior economist at ABN AMRO Bank, also expects U.S.-China relations to remain challenging as the chilly American stance commands bipartisan political support. But he thinks Biden recognizes that cooperation with China on topics such as climate change remains necessary.

"The new administration may well continue with strategic export and [foreign direct investment] restrictions and sanctions, but we do not expect a revival of the bilateral tariff war," he said.

Speculation is growing over when China will leapfrog the U.S. as the world's biggest economy. China's GDP will surpass that of the U.S. as early as 2028, the Japan Center for Economic Research and British think tank Economic Business Research Center predicted in December, as their contrasting recoveries from the pandemic accelerate the process.

The majority of the surveyed economists hold a less ambitious view. Twelve out of 18 valid responses predicted it would happen in "2030-34," while five other economists selected "2025-29" and one chose "2035-39."

Qu Hongbin, HSBC's chief China economist, forecast China to overtake the U.S. by 2030.

"China's drivers of productivity, such as its increased push towards innovation, higher-quality human capital and room for further capital investment, will mean that its growth rate will remain at a sufficiently fast pace to allow for further catch-up growth," he said.

Sean Taylor, Asia Pacific chief investment officer at DWS, predicts the change will occur between 2030 and 2034. China's growth is likely to settle at 5% to 6% after a strong recovery in 2021, he said, while heavy U.S. government debt accumulated during the pandemic drags long-term growth to 2% to 3%.

Tetsuji Sano, chief Asia economist at Sumitomo Mitsui DS Asset Management, sees the shift happening between 2025 and 2029. China's aging population and low birthrate make it rational for the country to focus on boosting internal demand and developing advanced technologies.

"If the Chinese Communist Party's strong leadership continues, this approach will likely be successful," he said.

Mihoko Hosokawa, research executive at Mizuho Bank, agrees with the early time frame and thinks that China's economy, which has suffered less from COVID-19, will continue to grow faster than its American counterpart.

But Hosokawa noted that China's population is expected to decline starting around 2030.

"It is possible that the United States will overtake China again," she said.

The economists who responded to the survey: Arjen van Dijkhuizen, senior economist, ABN AMRO Bank; Aidan Yao, senior emerging Asia economist, AXA Investment Managers; Helen Qiao, head of Asia economics, Bank of America Global Research; Ricky Choi, principal economist, Bank of China (Hong Kong); Celia Lam, economist, Bank of East Asia; Jian Chang, chief China economist, Barclays Asia Pacific; Chen Xingdong, chief China economist, BNP Paribas; David Wang, head of China economics, Credit Suisse; Kevin Lai, chief economist, Asia ex-Japan, Daiwa Capital Markets; Samuel Tse, economist and strategist, DBS Bank; Sean Taylor, chief investment officer, Asia Pacific, DWS; Francoise Huang, senior economist for Asia-Pacific, Euler Hermes; Kenny Wen, wealth management strategist, Everbright Sun Hung Kai; Brian Coulton, chief economist, Fitch Ratings; Thomas Shik, chief economist and head of economic research, Hang Seng Bank; Qu Hongbin, chief China economist, HSBC; Cheng Shi, chief economist, ICBC International; Iris Pang, chief economist, greater China, ING Bank; Shen Jianguang, chief economist, JD Technology Group; Sophie Altermatt, economist, Julius Baer; Ken Chen, Chinese economy analyst, KGI Asia; Mihoko Hosokawa, research executive, Mizuho Bank (China); Christina Zhu, economist, Moody's Analytics; Robin Xing, chief China economist, Morgan Stanley; Fan Xiaochen, director of the Economic Research Office (Hong Kong), MUFG Bank; Ting Lu, chief China economist, Nomura; Tommy Wu, lead economist, Oxford Economics; Shaun Roache, Asia-Pacific chief economist, S&P Global Ratings; Wei Yao, chief Asia and China economist, Societe Generale; Shuang Ding, chief economist, greater China and North Asia, Standard Chartered Bank; Tetsuji Sano, chief Asia economist, Sumitomo Mitsui DS Asset Management; Wang Tao, head of China economic research, UBS

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