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China GDP expected to grow 7.7% in Q2 on exports: Nikkei survey

COVID, weak consumption and tensions with US are seen as key risks

Economists expect exports to continue to boost China's growth in the second quarter.   © Reuters

HONG KONG -- China's economy is expected to expand by 7.7% in the April-June quarter, boosted by strong exports, according to a survey of 29 economists conducted by Nikkei and Nikkei Quick News.

Although that forecast is lower than the 18.3% recorded in the January-March period (which was, in part, boosted by a low year-ago comparison base), economists generally believe that the growth momentum in the Chinese economy will continue.

Growth estimates for the second quarter range from 6% to 10.5%.On average, economists predict 1.4% growth on a quarterly basis, higher than the 0.6% growth in the previous quarter. The average full-year growth forecasts are 8.6% for 2021, 5.5% for 2022 and 5.2% for 2023.

Xu Sitao, chief economist at Deloitte China, who forecast 7% growth for the second quarter, said exports will remain the biggest driver of growth. Although consumption is still slow, he believes it will pick up as China's vaccination program progresses.

"As China's vaccination rate continues to rise, the government will accelerate the normalization of economic activity, leading to a return of consumer confidence and encouraging businesses to invest," he said.

Shen Jianguang, chief economist at JD Technology, who sees 7.6% growth in the second quarter, said the figures in May fell short of expectations which suggests that the foundation of economic recovery is not solid enough.

"Exports and property investments are still the main support for the economy, while the recovery in consumption and manufacturing investments are still sluggish. The recovery in external demand is obviously faster than internal demand," he said.

Euler Hermes Senior Economist for Asia-Pacific Francoise Huang said renewed COVID-19 outbreaks could continue to weigh on household confidence. Huang expects 7.3% growth in the second quarter.

"The post-COVID-19 recovery of the domestic economy is not complete yet," she said, adding that it is necessary for private consumption to recover in order to achieve a "fully broad-based" recovery.

With a full-year forecast of 9%, Arjen van Dijkhuizen, senior economist at ABN Amro Bank, believes consumption will continue to improve over the course of this year as China's vaccination rate ramps up. But Aidan Yao, senior emerging Asia economist at AXA Investment Managers, cautioned that China's growth momentum was "close to peaking" in the quarter.

"[The economic growth] should start to soften in the second half of the year, due to rising headwinds both externally and internally, including the slowing demand for Chinese exports and deteriorating credit impulse," Yao said.

Most of the economists cited vaccination delays and new COVID outbreaks and variants as major risks for China this year, followed by weak consumer confidence, trade tensions and company sanctions.

Ken Chen, KGI Asia's Chinese economy analyst, believes the uncertainty around the COVID situation is the biggest risk to China's economy, saying that "it will hit the supply and demand side in the hardest way."

Chen added that the recovery in consumption, which is the major area for the sustainable recovery of the economy, is relatively slow. "The key issue is to increase consumer confidence," he said.

However, Iris Pang, chief economist for Greater China at ING Bank, fears U.S.-China tensions the most. "The number one risk is the technology war imposed by the U.S. and its allies, which affects China companies' profits and survival," she said.

Tetsuji Sano, chief Asia economist at Sumitomo Mitsui DS Asset Management, also ranks U.S.-China tensions as the top risk, particularly as President Joe Biden's administration has strongly condemned China for its treatment of Uyghur Muslims. He said there was more room for negotiation in the previous administration under Donald Trump.

"If the conflict due to the difference in ideologies emerges at the beginning of the talk, the two countries will continue walking on parallel lines and it will be unlikely for them to reach any concrete agreement," Sano said.

Kenny Wen, wealth management strategist at Everbright Sun Hung Kai, is also concerned that the U.S. government will put pressure on China again as its economy recovers.

Mall staff check shoppers' vaccination certificates in Shanghai.   © Reuters

"We forecast that U.S.-China tensions may rise in the second half of the year, which will affect some companies and the overall investment sentiment," he said.

Beijing announced in May that it was lifting its two-child limit to allow families to have up to three children after the 2020 census revealed the slowest population growth since the 1950s. Yet, most economists do not see this policy making much difference.

"Since the two-child policy failed to persistently boost China's birthrate, we don't expect the three-child policy to alter the population trend in a meaningful way," said Christina Zhu, an economist at Moody's Analytics.

She added that even if families are willing to have three children, it will strain the financial burden on the middle-aged and middle-income segments of society in the near term, and hinder China's transformation into a consumption-led growth model.

Cheng Shi, ICBCI's chief economist, believes that the success of the three-child policy does not only depend on the promotion and effectiveness of the policy itself, but also relies on other supporting measures.

He said Beijing will need to further improve social security, promote workplace equality for women, lower the cost of giving birth, and provide tax reduction and subsidies, among other measures, for the policy to work.

Sean Taylor, chief investment officer for the Asia Pacific at DWS, expects the population in China to peak in the next five years, and the working-age population to decline. Rather than promoting the three-child policy, he suggested that measures targeted at increasing labor force participation rates and enhancing productivity would work better to buffer demographic headwinds to economic growth.

Oxford Economics lead economist Tommy Wu said there was no need to be "too gloomy" about China's shrinking population. He said it did not mean that China's growth would stall because the country would continue to invest in technology and automation to boost productivity.

"However, what does matter is whether China can improve its health care and social safety net in time to support the aging population and without dragging significantly on future household consumption growth," he 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; Celia Lam, economist, Bank of East Asia; Jian Chang, chief China economist, Barclays Asia Pacific; Chen Xingdong, chief China economist, BNP Paribas; Helen Qiao, head of Asia economics, BofA Global Research; Kevin Lai, chief economist, Asia ex-Japan, Daiwa Capital Markets; Samuel Tse, economist and strategist, DBS Bank; Xu Sitao, Chief Economist and Partner, Deloitte China; 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; Cheng Shi, chief economist, ICBC International; Iris Pang, chief economist, greater China, ING Bank; Shen Jianguang, chief economist, JD Technology Group; 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; Carlos Casanova, chief economist, Asia, UBP

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