China's GDP growth beat estimates. What does it mean for 2021?

On many fronts, China’s economy looks like it’s back on track.

Last week, China reported 2.3% GDP growth for 2020, a stronger-than-expected number that showed a V-shaped recovery from a pandemic-induced economic slump that is still devastating most economies globally.

It will be the only G20 economy to post GDP growth for last year, according to the IMF’s latest World Economic Outlook.

The recovery of China, the first country to go under a lockdown last year, is underpinned by gains in industrial production, investment, and exports, especially toward the final months of 2020. Retail sales, an indicator of consumer sentiment, remain sluggish due to a slow recovery in the catering and restaurant industries.

Still, finance leaders tell FM magazine they are optimistic about China’s economic rebound to continue this year. They plan to maintain investments to increase capabilities and meet demand and are focused on reforecasting throughout the year to adapt to changes in the macro environment.

COVID-related exports bolstered growth

Industrial production led the economic comeback. Production grew 2.8% year on year owing to strong demand for personal protective equipment and electronic devices. China’s factories exported billions of masks through December, and orders for hospital gowns and ventilators, and computers and office devices as locked-down populations globally worked from home, accelerated export growth for the year.

Trade data from China’s customs agency earlier this month showed that the country’s exports hit a record high in December ending 2020 with a $535 billion trade surplus, the highest since 2015.

“Exports is growing, but a lot of it was driven by COVID-related demand. I would expect that kind of demand to gradually dissipate this year,” said Tommy Wu, lead economist at Oxford Economics in Hong Kong.

Wu points to recovery signs in more traditional export categories, such as automobile parts, toys, furniture, and mobile phones, that will help sustain China’s economic growth in 2021.

At German cleaning equipment company Kärcher’s factory in Jiangsu province near Shanghai, 2020 was an exceptionally busy year. Its factory of 1,000 workers made cleaning and sanitising equipment to feed the booming demand from companies and households.

“2020 was our very best year in China,” said Aidan Goddard, FCMA, CGMA, vice-general manager and CFO of Kärcher Investment China, a subsidiary of Kärcher.

Production was disrupted only in the beginning of the year at the start of the virus outbreak. By April, factories in China were churning out orders at close to pre-COVID-19 levels, Goddard said. At Kärcher, getting orders was not an issue; the challenge was getting enough workers in its factory.

“It’s a very different world in China,” he said.

Continued lockdowns in countries in Europe and North America last year hampered industrial production, leading suppliers to turn to China to meet consumer demand.

“I would say that China today has an export boom,” he said. “The difficulty for many producers in China is actually getting shipping space in shipping containers.”

Retail sales down, but luxury segments soared

Retail sales went up 4.6% year on year in December but ended with a 3.9% decline for the full year, where sales in catering services dipped almost 17%. In contrast, online retail sales grew 10.9%.

“If you look at the monthly data, retail sales is a bit disappointing. Service consumption is still pretty weak,” Wu said.

Wu points to online services such as flight and hotel booking. There is recovery in those sectors, but growth has not returned to 2019 levels. And with recent flare-ups of COVID-19 cases in two provinces, China’s officials have advised people not to travel home for the upcoming Lunar New Year next month, which will further slow recovery in the travel and hospitality industries.

Certain retail segments, however, enjoyed strong performance last year. Godiva, an international seller of premium chocolates, saw double-digit growth in its e-commerce and supermarket channels.

“When it comes to retail, you need to talk about categories,” said Naturel Xu, FCMA, CGMA, head of finance of Godiva China. “Luxury brands actually did very well in China last year, which was what we experienced at Godiva China during the second half of 2020.”

During lockdowns and the border closure last year, consumers who would otherwise have spent on holiday trips splurged on luxury products, from leather goods to jewellery, and good food.

At the beginning of the virus outbreak last year, Godiva closed underperforming stores to contain losses. In February and March, its retail stores were raking in significantly less than their usual sales. But by June, same-store sales caught up to 2019 levels and some even performed better than the previous year, Xu said.

She added that the company is undergoing digital transformation to develop its offline-to-online strategy, where it is hoping to drive consumers from online sites to its storefronts. She expects to see double-digit overall revenue growth this year.

Retail sales are expected to be the main driver of China’s economy in the coming years as part of the government’s dual circulation strategy to boost domestic consumption and shift away from an export-led economy.

“By the second half of 2021, a larger percentage of the population would have been vaccinated, and employment and income shift will improve,” Wu of Oxford Economics said. “These factors would support consumption growth.”

Corporate investment to drive 2021 growth

Fixed-asset investment picked up in the final quarter of last year as government spending on high-speed rails and 5G infrastructure helped prevent a steep slide in economic activity. Total investment grew 2.9% for the full year but at a rate slower than in 2019.

Signs of recovery are also seen in corporate investments, particularly by producers of pharmaceuticals, and computers and office devices, where investments grew 28.4% and 22.4%, respectively. Investment in real estate was up 7%.

“We can see that the economy isn’t just relying on the government sector,” Wu said. “Let’s put it this way: Companies see that recovery is underway, and they expect it to continue in 2021 and they’re willing to invest.”

Goddard is optimistic about 2021 and expects Kärcher’s investment in China to continue this year as part of the company’s long-term plan. Investment will include adding production lines and increasing automation in its factory.

“We don’t buy when there’s an up or down. We look five years ahead and invest strategically,” he said. “But if there’s a demand in the short term, we will look at satisfying that demand, whether it’s adding machinery or equipment.”

Looking ahead to 2021

Wu expects China’s growth drivers to shift from government-fuelled infrastructure investment to consumption and corporate investment in 2021. This is in line with the government’s desire to reduce spending and contain financial risk and debt.

Projections for China’s 2021 growth in the private sector and multilateral organisations range between 7% and 9%. Nomura, an investment bank, projects China’s GDP to grow 9% this year, while the World Bank estimates 7.9%.

“China’s policymakers have been talking about supply-side reform, dual circulation, and self-reliance on the technology front,” he said. “But for the first time they are also talking about demand-side reform. I think policymakers will try to increase the share of income for households to boost consumption.”

Economic projections may offer a glimpse of what to expect for China’s economy this year, but Xu said the key for finance teams is to be flexible in budgeting and planning.

“The business external and internal environment will always be changing. For finance planning, we need to be very flexible to cope with the change,” she said. “We should see planning in a continuous cycle as a norm.”

That doesn’t mean that three-year plans should be thrown out the window. By allowing periodic updates, plans will be more realistic for the business, Xu added.

“The pandemic might go on for another couple of years. Who knows what will happen next quarter? So we need to update plans, do rolling forecasts to keep up with changes,” she said. “Finance’s goal is to be a stronger business partner, and that will always be the priority.”

— Alexis See Tho (Alexis.SeeTho@aicpa-cima.com) is an FM magazine associate editor.