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China’s growth is back – so what’s next?

China’s recovery is well on track. So what happens now?

A host of domestic indicators in China, including industrial production, retail sales, exports and property investment reported impressive double-digit growth over January and February 2021. This bodes well for first-quarter GDP growth, which ANZ Research believes will surpass 19 per cent, year on year.

Low base effects and the global economic recovery will continue to bolster China’s growth in the second quarter. With the economic recovery firmly on track, there is increasing discussion about the country’s future policy direction.

Those who favour maintaining an accommodative policy argue the path to recovery is uneven, especially the labour market and business outlook for small firms. Lowering funding costs and keeping liquidity ample are thus still necessary, especially amid external risks to the real economy and financial market volatility.

Others who support a withdrawal of stimulus measures tend to be more concerned about financial bubbles and rapid credit expansion, which could increase the risks of another crisis. Thus, curbing the leverage ratio and asset price inflation, including property prices, are also gaining popularity among some policymakers.

In fact, China has already shifted from crisis mode and has been normalising since the second half of 2020. Policy measures will therefore, in ANZ Research’s view, be targeted rather than broad-based.


Lowering funding costs to support small businesses is something the government will continue in the second quarter, as stated by Premier Li Keqiang during the National People’s Congress.

However, ensuring a stable job market has become increasingly important to policymakers. The surveyed jobless rate jumped to 5.5 per cent in February, on par with Chinese policymakers’ tolerance level.

Even after taking into consideration seasonal factors due to the Lunar New Year holiday period and virus resurgences in some cities which could have dampened hiring, the deterioration in the local job market contradicts the rebound in general business activity. ANZ Research expects job market conditions will become more important in China’s policymaking process.

Similarly, pressure in the housing market has also caught the attention of policymakers recently. Measures such as limiting developers’ leverage ratios and bank lending to the property market have been implemented in the past several months, but property prices still rose 0.4 per cent month on month in February, up from 0.1 per cent growth at end-2020. Property investment also advanced after contracting significantly in the same period last year.

There is still a possibility that more tightening measures will be implemented on a regional basis. China has set a timeline to finalise property tax legislation by end of 2025. This is regarded as a long-term policy change to cool the property market.

China is also committed to achieving its carbon emission and renewable energy targets, the impact of which is still under-estimated by the market. New-energy cars and renewable-energy related infrastructure projects will also gather pace.


China’s monetary policy will strike a balance between lowering funding costs and preventing financial bubbles. Both of these require precise fine-tuning instead of broad-based changes in the policy rate.

Therefore, Chinese policymakers are unlikely to use rate hikes in advance of the US Federal Reserve’s normalisation or rate cuts. Instead, liquidity management will be conducted on a discretionary basis, mindful of not flushing the market with liquidity as it did last year.

China’s official fiscal deficit is set at 3.2 per cent of GDP for 2021. Although this is lower than the 3.6 per cent during the pandemic period in 2020, it is still above the 3 per cent threshold.

ANZ Research’s calculated consolidated fiscal deficit is steady at 8.0 per cent of GDP. However, policy efficiency is in question, especially for special local government bonds (SLGBs). SLGB issuance has risen 80 per cent since 2019.

In the near term, ANZ Research thinks the People’s Bank of China will refrain from tightening liquidity significantly, considering the deterioration in the labour market. However, policymakers will begin to tighten credit in the coming quarters due to concerns about financial bubbles.

The favourable base effects on growth momentum will fade during the second half of the year; the central bank will slightly accommodate the market demand for liquidity and the 10-year Chinese government bonds yield will decline thereafter.

Betty Wang is Senior Economist, China at ANZ Research

This is an edited version of a piece that appeared in the latest Asia Economic Outlook. Registered clients can click HERE to access the full report.

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