On a sequential basis, we see renewed pressure on China’s economic activity in 1Q21. Apart from less favourable seasonality during the lunar new year holiday (LNY,11–17Feb), recent mini COVID outbreaks in Jilin (273 local cases YTD), Heilongjiang (429) and Hebei (919), as well as the latest requirement of 14-day quarantine at home for travelling during the LNY, are expected to weigh on consumer sentiment during the traditionally busy season for travelling and retail sales in January and February.
◼ On the external front, we expect Chinese exporters to suffer from a shrinking profit margin, given the stronger RMB, higher raw material prices and soaring shipping prices. China’s raw material prices have seen positive MoM growth for 7 consecutive months, with their latest growth of 2.6% the fastest pace in 4 years. In addition, iron ore and copper prices recently rose to a ten-year and nine-year high (Fig8and9), respectively. Meanwhile, the shortage of shipping containers due to a lack of return trips to China amid the pandemic has pushed the shipping prices of Chinese exports, especially to Europe, to a record high (Fig2).
◼In this sense, we believe China’s sequential growth in Q1 will moderate notably versus the previous quarter. For the official Manufacturing PMI due on 31Jan, we forecast a moderation to 51.5 from last December’s 51.9. That said,we doubt recent miniCOVID outbreaks will get out of control given the government’s quick reaction, and still look for positive YoY growth in Q1. We expect China’s PPI to deliver positive YoY growth in January for the first time in almost two years.
It’s too early for China to slow materially outside of COVID-impacted areas and sectors. The big slowing is H2 and beyond.