China heads for record GDP growth in months of wild data swings

China watchers are in for a wild ride of economic data in the early months of 2021, giving a largely distorted picture of the recovery from coronavirus shutdowns a year ago.

The world’s second-largest economy was the first to go into lockdown to control virus outbreaks in 2020, leading to an historic contraction in gross domestic product in the first quarter of last year. That means year-on-year comparisons for the main indicators watched by most economists will show surging growth over the next few months.

“Buckle up, is the best advice,” said Freya Beamish, chief Asia economist at Pantheon Macroeconomics Ltd. “Year-on-year is going to tell us very little about how things are evolving.”

Economists are lining up alternative comparisons to cope with an issue that will hit other major economies from the Spring. Some are relying on month-on-month data or using 2019 as a base year to avoid annual figures that will flatter the pace of China’s recovery.

Distortions will show up first in data recording industrial production, retail sales and investment. These are usually released monthly, but because of the Lunar New Year holidays—which fall sometime in the first two months of the year—China typically combines the release of January and February’s data and publishes them in March.

Because of factory shutdowns last February, even if industrial output in the first two months of this year remained constant from the level in December, the annual growth rate would be 25%, said Adam Wolfe, an economist at London-based Absolute Strategy Research.

Record GDP

The big one to watch will be first-quarter GDP, which is scheduled for release on April 16. It could hit a record 18.1% compared with a year ago, according to a Bloomberg survey economists. Wolfe says “a print above 20% can’t be ruled out, even with the current restrictions on travel for the new year holiday.”

China’s quick suppression of coronavirus means the base effect will fade in quarterly data after March, but the impact on annual growth will remain. If GDP remains at the same level for the whole of 2021 as in the last quarter of 2020, the economy would still register 6.6% average growth for the full year, according to the Institute of International Finance. That is the biggest base effect of any country, reflecting China’s ability to return to pre-pandemic growth levels by the end of last year.

“China had its Covid-19 in the first quarter of 2020, unlike most other countries where the contraction was only in the second quarter,” said IIF Chief Economist Robin Brooks. “That gives a steeply upward sloping profile for China’s GDP in the course of 2020, which means that the statistical carry over is very high.”

The data will pose a challenge to Chinese policy makers, who tend to watch carefully for signs of overheating in the economy. A premature withdrawal of policy support is among the biggest risks to China’s recovery this year, the World Bank has warned.

“Last year’s extremely depressed low base will inevitably make this year’s macro numbers look super strong, which does not necessarily mean that the economy has become overheated,” said Yan Wang, chief China strategist at Alpine Macro.

Financial data will be distorted in the opposite direction as Beijing encouraged a torrent of lending last year to support businesses through lockdowns. Growth of new loans, money supply and aggregate financing may slow down compared with last year even if there are large absolute increases, Sun Guofeng, head of the monetary policy department at China’s central bank wrote in an article.

Economists are likely to gauge the recovery by comparing with the previous month, the previous quarter, or by taking 2019 as a baseline and calculating average growth over the two years since, said Ding Shuang, chief economist for Greater China at Standard Chartered Plc in Hong Kong.

Monthly business surveys, like the Purchasing Manager’s Index, may give a better picture of the recovery. Already there are signs of a peaking late last year and a weakening in activity in January due to new travel restrictions to control flare-ups of the coronavirus.

High frequency indicators, like transport data, car sales and cinema box-office income, could also prove useful.

“Monthly changes of high frequency indicators such as industrial production or retail sales will be more indicative,” said Raymond Yeung, chief economist for Greater China at Australia & New Zealand Banking Group in Hong Kong. “We should also pay attention to how consumption and passenger traffic fare during the Lunar holidays.”