China exceeds forecasts with growth of 8.1% in 2021; faces headwinds

The Chinese economy rebounded in 2021, with its best growth in a decade, helped by strong exports, although there are signs that the momentum is slowing due to the weakening of consumption and the fall in the real estate sector, which points to a the need for more political support.

Growth in the fourth quarter hit its lowest level in a year and a half, according to government data released on Monday, shortly after the central bank moved to prop up the economy by cutting the benchmark lending rate for the first time. once since the beginning of 2020.

The world’s second-largest economy is struggling with a rapidly cooling housing sector as well as sporadic small-scale COVID-19 outbreaks that could deal a blow to its factories and supply chains.

Several Chinese cities went on high alert ahead of the Lunar New Year travel season as the omicron variant reached more areas, including the capital Beijing.

The economy grew 8.1% last year, its best expansion since 2011 and above the forecast 8%. The pace was well above the government target of “more than 6%” and the revised 2020 growth of 2.2%. The economy posted its weakest growth in 44 years in 2020, but staged a faster recovery than other major economies.

The Gross Domestic Product (GDP) grew 4% in the last quarter, according to data from the National Statistics Office (NBS, for its acronym in English), better than expected, but still at its weakest pace since the second quarter of the 2020. Growth was 4.9% in the third quarter.

“At present, the downward pressure on China’s economy is still relatively large, and the growth of employment and income of residents is restricted”, said Ning Jizhe, head of the NBS, at a press conference.

In quarter-on-quarter terms, GDP grew 1.6% in October-December, versus expectations of a 1.1% increase and a revised 0.7% increase in the previous quarter. The Chinese economy is off to a good start in 2021, but economists expect growth to slow in coming months.

The central bank unexpectedly cut borrowing costs on its medium-term loans for the first time since April 2020, leading some analysts to expect more policy easing this year to hedge against the rising risk of property developers defaulting.

The People’s Bank of China (PBOC) announced a 10 basis point reduction in interest rates on 700 billion yuan ($110.2 billion) worth of medium-term loans to some financial institutions, up to 2.85%. It also cut the rate on “repos” (repurchase rates) to seven days.

“Economic momentum remains weak amid repeated virus outbreaks and a struggling real estate sector. Therefore, we anticipate another 20 basis point cut in PBOC interest rates during the first half of this year”, noted analysts at Capital Economics in a note.

But Nomura said in a note that the room left for further rate cuts this year is small: “We expect another ten basis point rate cut before mid-2022″.