Five key calls on China’s economic future

07 October 2021

Peiqian LiuChina Economist. Ranked Top 10 China forecasters by Bloomberg.

View bio

Other insights

View more insights

From supply shortages and property sector stresses to broad and ambitious regulatory shifts, China’s economy continues to keep investment managers and corporate finance decision-makers on their toes. Here are five key calls on the country’s economic future and what they could mean for you.

Growth will slow further – but exports will remain resilient

China’s economic momentum slowed into the third quarter as a resurgent coronavirus weighed on consumption, and it will slow even further in the fourth quarter, dragging down our full-year 2021 economic growth estimates from 8.5% of gross domestic product (GDP) to 8.2%.

Growth is cooling slightly (100 = GDP in Q4 2019)

Sources: NatWest Markets.

But against that backdrop, exports and industrial production outperformed, the latter rising 13.1% year-to-date, as the world’s purse strings loosened on the back of a recovery. Domestically, consumption has also stabilised – retail sales also rose 18.1% in the first 8 months of this year compared with the same period in 2020. Going forward, we expect consumption growth will accelerate and think China will continue to benefit from rising external demand, which is positive for exports. But the recent supply shortages (especially electricity) will likely have a negative impact on global supply chains and put upward pressure on prices in the near term.

China’s trade balance is improving (annual totals in USD billions)

Sources: CEIC, NatWest Markets.

Inflation will remain elevated as supply shortages continue into early 2022

Producer price inflation (PPI) surged to decade-highs of 9.5% in August, driven by shortages of raw materials that have been more acute and longer lasting than previously thought due to the Delta variant outbreak. Domestic consumers, on the other hand, have been fortunate to see little of this passed onto them in the form of price hikes. Consumer price inflation (CPI) did rebound slightly, reaching 0.8% in Q3, but remains well below the government’s 3% target.

We think CPI will remain soft going forward, as food prices cool and domestic demand continues to recover gradually, and we expect PPI to ease as supply shortages start to taper off in the early months of next year.

Consumer prices should soften but raw material prices will take more time to ease (year-on-year percentage change in inflation)

Sources: CPB Netherlands. NB. Core CPI is a measure of consumer price inflation that excludes energy and food prices, which tend to be highly volatile near-term.

Monetary, fiscal easing will remain targeted

A slowing property sector, soft consumer spending and credit market stress were met with a dovish – albeit targeted – response from the People’s Bank of China (PBoC) this year. It has, for instance, swooped in to support small and micro enterprises with a CNY 300 billion re-lending facility, and has tried to ensure the interbank market has ample liquidity through cuts to the reserve requirement ratio (the minimum amount that a commercial bank must hold in liquid assets).

We expect another 50 basis points of cuts in the reserve requirement ratio in Q4 to partially meet the liquidity demand for CNY 2.45 trillion maturing medium-term lending facility. We also think the fiscal impulse (a broad indicator that reflects the impact of China’s fiscal policy on economic demand) will rebound slightly in order to help stabilise infrastructure investment. Finally, we believe the PBoC will keep benchmark rates such as the Loan Prime Rate (LPR) unchanged until at least end-2022.

‘Common Prosperity’ means less fixation on GDP, property & construction-driven growth – but more balance across the economy

In recent months, policy makers elevated achieving “Common Prosperity” – a broad ambition to generate more balanced growth across the economy – to the number one long-term policy goal in China.

This is as much symbolic as it is substantial. More clarity is needed from policymakers on the finer points of “Common Prosperity”, which should arrive during the upcoming Plenum and Politburo meetings in November. But we already have seen hints of the policy at work – it includes a series of targeted regulatory changes introduced in the technology, telecoms, education, and pharmaceuticals sectors and aimed at mitigating risks like excessive debt accumulation, data security, and inequality of access to services. In the meantime, capital inflows have slowed since Q2 as foreign investors stayed on the side-lines due to intensified regulatory change.

Monthly bond and equity flows have slowed (USD billions)

Sources: Bloomberg, NatWest Markets

Going forward, we expect regulatory changes to continue across sectors and aim at bringing more certainty and fairness for doing business in China, both for foreign and domestic businesses. It will also see governments shift away from turning to the property and construction sectors to generate a quick bump in GDP, and instead focus on improving the social safety net and labour productivity. We’re also sceptical that “Common Prosperity” will necessarily disadvantage entrepreneurs and asset owners.

A third infection wave and credit market stresses will be key risks to watch

Uncertainties created by a resurgent pandemic and disruptions to global supply chains remain the biggest challenges confronting businesses in the short term. Indeed, rising shipping and raw material costs will continue to weigh on the profitability of Chinese manufacturers and those who depend on their wares. Ultimately, this risks inflation rising (and broadening) and growth falling.

Shipping costs also remain high, and are rippling through global supply chains (index of shipping prices, January 2020 = 100)

Sources: Freightos Baltic Container Freight Rate, NatWest Markets

At the same time, concerns over credit market stress in China will weigh on investor sentiment. We think the risk of default in various pockets of the economy – including, most visibly, the property sector – add to the headwinds facing China’s financial markets and economic stability.

Login to Agile Markets to read our latest analysis on China. Don’t have access? Contact your NatWest Corporates & Institutions representative or get in touch with us here.

Markets & Economy


This document has been prepared for information purposes only, does not constitute an analysis of all potentially material issues and is subject to change at any time without prior notice. NatWest Markets does not undertake to update you of such changes.  It is indicative only and is not binding. Other than as indicated, this document has been prepared on the basis of publicly available information believed to be reliable but no representation, warranty, undertaking or assurance of any kind, express or implied, is made as to the adequacy, accuracy, completeness or reasonableness of the information contained in this document, nor does NatWest Markets accept any obligation to any recipient to update or correct any information contained herein. Views expressed herein are not intended to be and should not be viewed as advice or as a personal recommendation. The views expressed herein may not be objective or independent of the interests of the authors or other NatWest Markets trading desks, who may be active participants in the markets, investments or strategies referred to in this document. NatWest Markets will not act and has not acted as your legal, tax, regulatory, accounting or investment adviser; nor does NatWest Markets owe any fiduciary duties to you in connection with this, and/or any related transaction and no reliance may be placed on NatWest Markets for investment advice or recommendations of any sort. You should make your own independent evaluation of the relevance and adequacy of the information contained in this document and any issues that are of concern to you.

This document does not constitute an offer to buy or sell, or a solicitation of an offer to buy or sell any investment, nor does it constitute an offer to provide any products or services that are capable of acceptance to form a contract. NatWest Markets and each of its respective affiliates accepts no liability whatsoever for any direct, indirect or consequential losses (in contract, tort or otherwise) arising from the use of this material or reliance on the information contained herein. However this shall not restrict, exclude or limit any duty or liability to any person under any applicable laws or regulations of any jurisdiction which may not be lawfully disclaimed.

NatWest Markets Plc. Incorporated and registered in Scotland No. 90312 with limited liability. Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and Prudential Regulation Authority. NatWest Markets N.V. is incorporated with limited liability in the Netherlands, authorised and regulated by De Nederlandsche Bank and the Autoriteit Financiële Markten. It has its seat at Amsterdam, the Netherlands, and is registered in the Commercial Register under number 33002587. Registered Office: Claude Debussylaan 94, Amsterdam, the Netherlands. Branch Reg No. in England BR001029. NatWest Markets Plc is, in certain jurisdictions, an authorised agent of NatWest Markets N.V. and NatWest Markets N.V. is, in certain jurisdictions, an authorised agent of NatWest Markets Plc. NatWest Markets Securities Japan Limited [Kanto Financial Bureau (Kin-sho) No. 202] is authorised and regulated by the Japan Financial Services Agency. Securities business in the United States is conducted through NatWest Markets Securities Inc., a FINRA registered broker-dealer (http://www.finra.org), a SIPC member (www.sipc.org) and a wholly owned indirect subsidiary of NatWest Markets Plc.

Copyright 2021 © NatWest Markets Plc. All rights reserved.