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China GDP to grow 8.2% in 2021, the most in 10 years: Nikkei survey

Corporate defaults, US tensions and COVID seen as downside risks

Employees make Christmas products at Fuye toy factory in Yiwu, China's Zhejiang Province.   © Reuters

HONG KONG -- China's economy is forecast to expand 8.2% in 2021, the highest growth since 2012, according to a survey of 35 economists by Nikkei and Nikkei Quick News.

Despite the continued strong recovery from its pandemic slump, corporate defaults remain a major downside risk to the world's second-largest economy.

Most economists expect U.S. President-elect Joe Biden's administration will take a more predictable and less confrontational approach towards China -- which could give a short-term boost to the Chinese recovery.

China fell into negative growth in the first quarter of 2020, when the coronavirus outbreak hit the country, but it successfully contained the spread and staged an economic recovery earlier than other countries.

According to the Nikkei/NQN survey, China's economic growth rate is expected to accelerate from 4.9% in the third quarter to 5.9% in the fourth. Their average forecast for China's GDP growth in the full year of 2020 is 2.1%.

Nearly 80% of the economists anticipate the growth rate for 2021 will be higher than 8%. They include Ting Lu, chief China economist at Nomura, who predicted a 9% increase, owing in part to the low base effect in 2020.

Jian Chang, Barclays Asia Pacific's chief China economist, predicted an 8.4% rebound in 2021. "Our outlook mainly factors in the strong exports manufacturing production, more constructive view on manufacturing investment on surging exports, and further catch-up in services and consumption," he said.

Iris Pang, chief economist for Greater China at ING Bank, said consumers will continue to spend in mainland China if international travel restrictions remain in place for most of 2021. "Exports and imports will be more balanced due to the better economic environment in China compared to the rest of the world," she added.

But Xu Xiaochun, an economist at Moody's Analytics, cautioned that while the domestic economy is recovering confidently, the major downside risks lie outside of China.

"There is significant uncertainty regarding the rising number of new COVID-19 infections in the U.S. and Europe, while China's relationship with other governments has increasingly led to tensions," Xu said. "These may compromise China's strong exports growth, domestic production and investor confidence."

The economists also looked ahead to the transition from U.S. President Donald Trump's hawkish stance on China to President-elect Biden's yet-unknown policy stance.

"We expect U.S.-China relations to remain challenged under a Biden administration, as the critical attitude in the U.S. versus China is bipartisan," said Arjen van Dijkhuizen, senior economist at ABN Amro Bank. "That said, under Biden, U.S.-China relations will likely be managed in a less chaotic way."

He said a renewed U.S.-China tariff war is less likely, adding that US-China tensions will be less of an issue with the potential to shock financial markets.

Cheng Shi, chief economist at ICBC International, is optimistic that Biden will take a more constructive approach to easing tensions with other major economies, with an attempt to rebuild the disrupted global order of Trump's term.

"Multilateralism, or internationalism, is expected to become the U.S. foreign strategic proposition again," Cheng said.

He said the U.S. could rebuild its leading position in the World Trade Organization, World Health Organization, Trans-Pacific Partnership and other multilateral mechanisms through the topics of climate change and global health. "Therefore, Sino-U.S. economic and trade frictions are expected to have a certain level of relief, which will benefit the recovery of China's economy," Cheng added.

Alvin Chan, head of product development and retail research of Everbright Sun Hung Kai, foresees the U.S. cooperating with China on such challenges as environmental protection, while continuing to compete with it in science and technology, as well pressuring Beijing on human rights.

Some economists, including Francoise Huang, senior Asia-Pacific economist at Euler Hermes, are less optimistic. Huang said while further tariff hikes are unlikely, this does not not necessarily imply a better outcome for China.

"A more cooperative foreign policy with a Biden administration could imply the U.S. teaming with its traditional allies to take action against China, " Huang said.

Julius Baer economist Sophie Altermatt does not expect the existing tariffs to be removed quickly: "The rivalry between the two countries in the technology sector, as well as conflicts over market access, security concerns, human rights and intellectual property, will continue to shape the relationship between China and the U.S."

A gloomier view is held by Kevin Lai, chief Asia ex-Japan economist of Daiwa Capital Markets, who said Trump is planning further sanctions against Chinese companies on the grounds of national security, human rights and Hong Kong.

"U.S.-China relations seem headed towards a path of no return," he said. "Very little can be done to reverse this now."

Apart from external factors, economists are concerned about China's debt crunch and soured loans at banks -- the most common downside risk cited for China's economy in 2021.

Recent months have seen a string of corporate bond defaults by state-owned companies -- notably semiconductor giant Tsinghua Unigroup. Paul Tang, chief economist at Bank of East Asia, said if companies cannot survive these shocks they may cut jobs or even exit their markets, causing a wave of unemployment.

"The deterioration in the labor market will translate into a slowdown in consumption growth and drag on economic growth," he said. Tang also warned that problems remain in financing for small and midsize enterprises. Companies may find it harder to borrow after an expected further tightening of monetary policy next year.

Tommy Wu, lead economist at Oxford Economics, said corporate borrowing is the biggest concern in China's debt problems. "Some corporates, especially the real estate developers, have been borrowing heavily from offshore markets and they are subject to the risk of mass selling of debt by foreign investors," he said.

Michelle Lam, Greater China economist at Societe Generale, said corporate loans and bonds will be most exposed to the removal of stimulus next year. She noted that bond defaults by local government financing vehicles could not be ruled out.

"Policymakers seem eager to push ahead with the deleveraging campaign started a few years back, as evident in recent events, including SOE [state-owned enterprise] defaults, the 'three red line' policy to curb property leverage, tightening on fintech companies, etc.," she said.

"While the risk of a systemic crisis remains low, it will inevitably weigh on credit conditions and economic activity."

The economists who responded to the survey: Arjen van Dijkhuizen, senior economist, ABN AMRO Bank; Mo Ji, chief economist, Greater China, AllianceBernstein; Aidan Yao, senior emerging Asia economist, AXA Investment Managers; Helen Qiao, head of Asia Economics, BofA Global Research; Paul Tang, chief economist, Bank of East Asia; Jian Chang, chief China economist, Barclays Asia Pacific; Chen Xingdong, chief China economist, BNP Paribas; Liu Ligang, chief China economist, Citigroup; Xie Yaxuan, chief macro analyst, China Merchants Securities; David Wang, head of China economics, Credit Suisse; Kevin Lai, chief economist, Asia ex-Japan, Daiwa Capital Markets; Chris Leung, chief China economist, DBS Group Research; Francoise Huang, senior economist for Asia-Pacific, Euler Hermes; Alvin Chan, head of product development and retail research, wealth management and brokerage, Everbright Sun Hung Kai; Brian Coulton, chief economist at 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 Digits; Alexious Lee, head of China strategy, Jefferies; Haibin Zhu, chief China economist, JP Morgan; Sophie Altermatt, economist, Julius Baer; Ken Chen, Chinese economy analyst, KGI Asia; Mihoko Hosokawa, research executive, Mizuho Bank (China); Xu Xiaochun, 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; Michelle Lam, greater China economist, Societe Generale; Shuang Ding, chief economist, Greater China and North Asia, Standard Chartered Bank; Tetsuji Sano, chief Asia economist, Asia Research Center, Sumitomo Mitsui DS Asset Management; Wang Tao, head of China economic research, UBS.

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