China’s recovery is on track, but consumption remains in the spotlight

As much of the world continues to grapple with the short and long-term effects of the pandemic, and importantly bring cases and vaccination programmes under control, China has continued to forge ahead impressively in its recovery.

Fund Commentary
19 Apr 2021

As much of the world continues to grapple with the short and long-term effects of the pandemic, and importantly bring cases and vaccination programmes under control, China has continued to forge ahead impressively in its recovery.

The economy has now largely been in recovery mode for over nine months, as we saw retail and manufacturing sectors continue to gradually rise past pre-COVID 19 levels for the first time back in August.

Since then, the Chinese economy has continued to grow significantly in the first quarter of 2021, with economic data pointing to a continued recovery. And importantly, China’s GDP growth accelerated to 6.5% in the fourth quarter, compared to 4.9% in the third quarter, making China the first among the major economies to fully recover from the pandemic, posting positive GDP growth in 2020. A remarkable feat since it was achieved without aggressive monetary easing as seen in other major developed countries.

Quick reactions and promising outlooks

As has been well documented, the Chinese government reacted quickly to the pandemic, resulting in domestic factory output coming back online in April, just as much of the rest of the world’s manufacturing capacity was taken out by the spreading pandemic. This allowed China to produce and export the mass quantities of medical equipment (including face masks and safety-wear) and work-from-home equipment, such as laptops and computer monitors, so badly needed by much of the world.

Despite being ahead of other countries in its recovery, the Chinese government has recently set a modest annual economic growth target for China in 2021, at above 6%, even though analysts are tipping growth of around 8%.

The longer-term view is also positive. According to the latest International Monetary Fund (IMF) outlook, China will drive global economic growth as the world recovers from the COVID-19 pandemic. The country had already returned to pre-pandemic GDP in 2020, whereas many others are not expected to make a pre-pandemic recovery until well into 2023.

China will now contribute more than 20% of the total increase in the world’s gross domestic product through 2026, according to Bloomberg calculations based on IMF forecasts, followed by the US and India.

As active managers, we constantly review progress across many sectors and review the cyclical aspects of markets. But while China’s short- and long-term growth prospects are looking positive, we also must ask ourselves: what does the future really look like, and are there any headwinds or concerns we should be wary of?

Consumption – a key ingredient 

Despite a positive growth picture, there are still disparities in China’s economic recovery that need to be ironed out – and one, in particular, is support for domestic consumption. While domestic retail sales grew by one third in the first two months of 2021 compared to 2020, the figure is underwhelming when compared to 2019 levels. Moreover, the unemployment rate also rose to 5.5% at the end of February, up from 5.2% in December 2020, which could be a concern.

According to the National Bureau of Statistics in China, total consumption held back China’s economy in 2020 to the tune of -0.5 percentage points of GDP. In 2019, consumption made up 3.5 percentage points of the total 6% growth in GDP, according to national statistics. This data underlines how critical consumption is on the economy.

My investment commentary at the end of 2020 spoke about how the Chinese government was already looking to drive economic recovery through consumption. At the time, Premier Li Keqiang had recently called for more subsidies from local governments to the auto and home appliance industries.

This was hugely positive to see. Since then, domestic consumption aspects have performed well, not least over the Chinese New Year holidays through a broadly normalising economy and limited outbound travel. The sales value of China’s restaurants and retail increased, and so did the national cinema box office takings, which grew by about 35% year on year, despite a 75% capacity cap – according to data released by the government.

However, we also said back in December that we would not be surprised if further supportive policies are implemented should the economic recovery stall. Analysts have more recently pointed out that a large contributor to the Chinese recovery has been external demand and encouraging domestic consumption will be key to sustaining this.

A multi-faceted recovery

It is important to remember that while China supplies a lot of manufacturing output to the rest of the world, and we are already seeing a strong recovery in that regard, there are other sectors to consider when examining the overall picture of China’s economic recovery.

Some are still struggling: according to S&P Global, China’s COVID strategy has been successful in keeping the virus under control and provided ample support to the supply side. Yet, the services sector is set to recover much slower, putting a dent in the country’s employment figures and ultimately negatively impacting consumer spending and confidence.

Some other sectors have started to bounce back. For example, we are today seeing more interest in the property sector, which finally returned after the sector vastly underperformed against the index in 2020. Property stocks were buoyed by the news that 22 major cities adopted a new land sale rule to concentrate land auctions only three times per year, which will likely introduce more financial discipline from developers. It looks to us as though the property sector, being deeply cyclical, is now likely to re-rate and outperform this year.

What is clear to me is that the Chinese economy is far from stalling and is largely back on track. For investors, taking stock of the fundamentals of each sector, noting the cyclical nature of sectors and companies and where they are in their individual recoveries is more critical than ever before.

Following domestic and regional trends and news flow, including economic output data such as industrial output and consumption, will be the markers to follow as China continues along its road to full recovery.

Lilian Co is the portfolio manager of the Strategic China Panda Fund at Eric Sturdza Investments.

As always, we invite investors and prospective investors, to contact us should they wish to understand our views on the current situation and the positions held in the portfolio. Please do not hesitate to contact us for further information.

Adam TurbervilleAdam Turberville
+44 1481 742380



This article was originally published on Investment Week. The views and statements contained herein are those of LBN Advisers Limited in their capacity as Investment Adviser to the Fund as of 15/04/2021 and are based on internal research and modelling. Please click on Disclaimer Page to view full disclaimers.