Yuan faces further appreciation pressure
Chinese GDP rose 2.3% y/y in 2020. The slower growth mainly occurred in Q1 and Q2. Growth rose to 4.9% y/y in Q3, and 6.5% y/y in Q4, reaching the normal levels. Industrial output saw a similar GDP trend, and grew 2.8% y/y from 2019. Specifically, output rose 7.1% y/y in Q4, up 1.2 pps from Q4 2020. Investment rose 2.9% y/y, down 2.5 pps from 2019. But its growth rates have been rising throughout the year.
Consumption growth is still below normal. Retail sales of social consumption goods fell -3.9% y/y, and their real growth decreased -5.3% y/y in 2020. In particular, growth rose 4.6% y/y from Q4, down 3.1 pps from Q4 2020. Good pandemic control in China makes production resumption possible. Exports rose 4% y/y, down only 0.6 pps from 2019. Imports were instead weak, and fell -0.7% y/y.
In 2020, CPI rose 2.5% y/y, down 0.4 pps from 2019. The CPI growth rate has been declining throughout the year, specifically, from 5% in Q1 to 0.1% in Q4. It even saw negative growth in November. We expect CPI growth will first decrease and then rise this year. In 2020, producer prices first declined and then rose. The ex-factory price index of industrial goods fell -1.8% y/y, and PPI fell -2.3% y/y, down 1.5 and 1.6 pps from 2019 respectively.
Chinese policymakers adopted relatively loosening monetary policy in 2020 to counteract the impact from the pandemic. As the economy has gradually returned to normal, monetary policy has also returned to a robust style. Main financial indicators also displayed such trends. In the end of 2020, M2 was up 10.1% y/y, up 1.4 pps from the end of 2019, but still down 1 pps from the peak growth rate in 2020. The end of year M1 growth rate was 8.6% y/y, up 4.2 pps from the end of 2019, down 1.4 pps from its peak growth rate in 2020.
After the Chinese RMB rallied to a 30-month high against the dollar at a rate of 6.47, Beijing will make it easier for traders, multinational companies and outbound investors to use the yuan in international transactions. Policies include reducing the cross-border currency transaction procedures were announced on January 4th; lifting a firm’s overseas fund for their total equity from 30% to 50% on January 5th. At the same time, the dollar index declined. Given the good pandemic control in China and the loosening monetary policy abroad, we expect the RMB to experience enormous appreciation pressure, but will likely be gradual or stable, due to Beijing’s effort.
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