Will China grow faster in 2021? Risk, opportunities – With insights from The Wall Street Journal

The Chinese economy is expected to be the world’s largest by 2030. It has emerged from the Covid-19 pandemic in relatively good shape. But will it power up its trading partners? In this article, The Wall Street Journal’s Nathaniel Taplin argues that China’s heavy industrial complex could easily cool in the second half of next year. China is a major trading partner to South Africa. For more BizNews articles on China, click here.

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Chinese stimulus won’t do heavy lifting in 2021

The beginning of a global cyclical uptick might seem like a great time to own heavy industrial shares, but that part of China’s recovery is already long in the tooth

Beijing’s stimulus policies this year have been restrained by past standards, and certainly compared with those in the US and Europe. Now, with consumers spending again and private investment recovering, even that modest extra gas for the economy will start to burn away.

That could limit further upside next year for heavy industrial stocks like Komatsu Ltd. and Caterpillar Inc., which roared back in mid 2020 as Chinese construction and investment spending returned. On the other hand, the improving fortunes of Chinese households, underpinned by strong export and labour-market momentum, could help shore up consumer stocks like Alibaba, which have come under the pressure of increasing regulatory scrutiny.

China
Courtesy of The Wall Street Journal

China’s main November economic data, released Tuesday, showed private-sector investment is finally up again in 2020 year to date, compared with the same period last year. Retail sales continued improving and unemployment edged down. Real-estate investment softened to 10.9% growth year over year: still strong, but the slowest since June. Investment growth in power, rail and road infrastructure also eased.

It is notable that the slowdown in infrastructure and construction investment comes after an increase in bond yields and signs of a peak in overall credit expansion. Growth in overall outstanding debt and equity finance eased marginally in November for the first time in close to a year, thanks to slowing corporate-bond issuance and a quicker fall in shadow finance.

A spate of bond defaults by state-owned firms has pushed up bond yields in recent weeks. The central bank has acted to contain the increases, but hasn’t injected enough cash to push yields firmly back down again. Investors can take this as a hint that policy makers are comfortable enough with the shape of the recovery to let state-backed investment begin to ebb again.

Given the usual lags between borrowing and actual building, strong demand for heavy industrial products probably still has a few months to run. But by mid next year—just as the rest of the world is ramping back up—China’s heavy industrial complex seems likely to cool.

Komatsu stock is trading for 21 times expected earnings for the next 12 months, according to FactSet, just below its late 2016 valuation peak. The beginning of a global cyclical uptick might seem like a great time to own heavy industrial shares, but that part of China’s recovery is already long in the tooth. The best time for getting in may have passed.

Write to Nathaniel Taplin at [email protected]

WSJ opens select articles to reader conversation to promote thoughtful dialogue. See the ‘Join the Conversation’ area to the right for stories open to conversation. For more information, please reference our community guidelines. Email feedback and questions to [email protected].

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