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China's financial system grew by eight.1% in 2021 in comparison with the earlier yr

Volunteers wearing personal protective equipment (PPE) arrange food deliveries for a residential area in Shanghai under restrictions to stop the spread of Covid-19, on November 26, 2021.

Yin Liqin | China news service | Getty Images

BEIJING — China's economy grew 8.1% in 2021 as industrial production rose steadily through the end of the year, offsetting a decline in retail sales, according to official data from China's National Bureau of Statistics released on Monday.

GDP grew 4% year over year in the fourth quarter, according to the Bureau of Statistics. That's faster than the 3.6% increase predicted by a Reuters poll. For the year as a whole, Chinese economists are expecting average growth of 8.4% in 2021, according to financial data provider Wind Information.

Industrial production rose 4.3% in December from a year earlier, the agency said, beating Reuters' forecast of 3.6% growth. Notably, auto production grew for the first time since April, up 3.4% yoy in December.

Fixed investment for 2021 rose 4.9%, beating expectations for 4.8% growth. Investments in real estate increased by 4.4%, those in infrastructure by 0.4%.

Investments in manufacturing grew 13.5% year-on-year in 2021, with investments in specialty machinery growing the most at 24.3% year-on-year, according to data accessed via Wind.

However, retail sales missed expectations, growing 1.7% yoy in December. Analysts polled by Reuters had predicted a 3.7% rise.

"We must be mindful that the external environment is more complicated and uncertain, and the domestic economy is under the triple pressure of demand slowdown, supply shock and weakening expectations," the bureau said in a statement.

The urban unemployment rate in December was the annual average of 5.1%. The unemployment rate for 16 to 24 year olds remained significantly higher at 14.3%.

"The better-than-expected GDP data doesn't change the bigger picture: China's economy is facing multiple headwinds for now and a policy easing cycle is underway," said Larry Hu, Macquarie's chief China economist, in a note.

Hu pointed out how the People's Bank of China on Monday cut borrowing costs for medium-term loans for the first time since April 2020. He expects the central bank to cut the policy rate on January 20th.

China's zero-Covid policy hits spending

China's zero-Covid policy to combat the pandemic prompted renewed travel restrictions within the country – including the lockdown of the central Chinese city of Xi'an in late December.

In January, other cities were also put under full or partial lockdown to control outbreak hotspots related to the highly transmissible Omicron variant. Analysts have begun to question whether the benefits of China's zero-Covid strategy outweigh the costs, given how contagious and potentially less deadly the Omicron variant is.

Goldman Sachs lowered its forecast for China's GDP growth in 2022 on expectations that the zero-Covid policy will lead to increased restrictions on operations. However, analysts said the biggest impact would be on consumer spending.

Retail sales fell 3.9% in 2020 even as China's broader economy grew amid the pandemic. Consumer spending has since remained sluggish, partly because travel restrictions have dampened tourism.

In 2021, total retail sales increased by 12.5% ​​from the previous year's decline and also exceeded 2019 levels.

However, only urban areas saw retail sales increase last year from 2019 levels. Consumer spending in rural areas remained 1.8% below 2019 levels last year, according to CNBC analysis of wind data.

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Incomes for business workers have generally increased between 2020 and 2021, particularly in labor-intensive industries like hospitality and manufacturing, Christine Peng, UBS head of consumption sector Greater China, said during a media briefing last week.

However, she noted that rising uncertainty has caused consumers to delay buying consumable items like new air conditioners. Peng said consumers are also thinking longer-term, and female consumers within households are more willing to buy insurance or other financial management products.

Within the December retail sales data, automobiles saw the largest decline — down 7.4% year over year — followed by a 6% decline in appliances and a 3.1% decline in furniture. Daily necessities sales saw the largest increase last month, up 18.8% year over year.

"The pandemic could continue to hamper the resumption of consumer spending – although the situation in China remains relatively under control…compared to other major economies," said Bruce Pang, China Renaissance's head of macro and strategy research, in a statement. He expects consumption to remain under pressure in the first quarter.

“We believe China has an opportunity to ease COVID restrictions, which could boost consumption and market confidence; but it would be highly unlikely that it would abandon the non-tolerance approach before the Beijing Winter Olympics and the two sessions (annual parliamentary session in March), in our view."

China's gross domestic product grew by 2.2% in 2020 compared to the previous year. That's according to the latest figures from the National Bureau of Statistics, which released an annual data revision in December that trimmed 2020 GDP growth by 0.1 percentage point.

Compared to when it was first published in early 2021, real estate, transportation and accommodation and restaurants have seen the most downward revisions. Rental, leasing and business services saw the largest increases, followed by manufacturing.

Correction: This story has been corrected to reflect that Goldman Sachs revised its 2022 China GDP forecast. In an earlier version, the year was incorrectly specified.

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