The New Year of the Ox starting next Friday (12 February) bodes well for China: the International Monetary Fund forecasts that its economic growth will be 8.1% in 2021 and around 5.6% in 2022. This outstrips world output expectations of 5.5% in 2021 and 4.2% in 2022 and expectations for the US of 5.1% and 2.5% respectively. With such buoyant prospects, might China be able to successful decouple its supply chains with its key trading partners without harming its economy?
NN Investment Partners (NN IP) believes the current ‘technology decoupling’ with the United States will continue under President Biden. Furthermore, China stated in its latest 14th Five-Year Plan that it intends to focus less on international trade. Instead, the government will concentrate on boosting domestic demand and investing in its technology industry to drive growth.
China will also continue economic cooperation with the European Union, which signed a Comprehensive Agreement on Investment in December, while regional supply chains will be strengthened with the rest of Asia through the Regional Comprehensive Economic Partnership that was signed in November 2020.
NN IP notes that two developments will be important for the future growth of China. First, the continuation of Belt and Road initiative that aims to connect Asia with Africa and Europe for trade and integration and even more importantly, the pledge to achieve carbon neutrality by 2060, which will open immense opportunities linked to the new green technologies in which China leads.
Marcin Adamczyk, Head of Emerging Markets Debt, NN Investment Partners: “China has been able to recover quickly because it controlled the pandemic quickly, which enabled it to fill the gap caused by production bottlenecks in countries where Covid-19 restrictions were still in place. It achieved exceptionally strong export growth, which included Covid-related items such as face masks. Spectacular export performance provides a comfortable bridge from protecting the growth in global crisis environment and into the future strategic rebalancing process.
Adamczyk continues: “China’s economic growth should markedly outperform that of the US and Instead of being a petro-state, the People’s Republic may become an “electro-state”, with Chinese firms today producing more than 70% of the world’s solar modules, 69% of lithium-ion batteries and 45% of wind turbines. They also control much of the refining of minerals critical to clean energy, such as cobalt and lithium. The opportunity for China to decouple in a positive way is very much possible.”