How to think about China’s GDP growth in 2021

CHINA FINANCIAL - Report 20 Nov 2020 by Michael Pettis

Special points to highlight in this issue:
• Analysts are beginning to project a very strong recovery for Chinese growth next year based on their models for consumption growth. These were the same models that predicted earlier this year that 2020 GDP growth rates would be close to zero or substantially negative.
• These models are output models, and while I think they may make sense when applied to other economies, they do not work in China, where GDP is an input measure, not an output measure. China’s GDP growth will be determined as a political consideration, and so lower-than-normal growth in consumption and business investment was automatically matched this year with higher growth in local-government infrastructure spending and real estate development. Next year we should expect the opposite.
• That is why these models underestimated GDP growth earlier this year and will almost certainly overestimate next year’s growth.
• The key determinant of next year’s GDP growth rate, in my opinion, will be the outcome of the persisting debate between those in Beijing more worried about rising debt and those more worried about slowing growth. Depending on who is in the ascendance, I expect GDP growth next year to be either in the 6-7 percent range or in the 7-8 percent range. Given the deterioration this year in every measure of debt sustainability, I suspect it will be the former, especially if the current bond market turmoil persists.

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