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Three Questions About China’s Economic Outlook

Explore China's economic outlook in 2021 and beyond. We look at new growth drivers, the Five-Year Plan and when China will become the largest world economy.

May 11, 2021

What Are China’s Growth Drivers in 2021?

In 2021, with the recovery of household income, successful pandemic control, vaccine availability, and policy normalization, we expect to see growth rotation in two key areas: from investment to consumption and services, and from real estate and infrastructure to manufacturing investment. In particular, we expect consumption to resume its role as the leading growth driver, taking GDP from a drag of 0.5%pts in 2020 to a lift of 6.6%pts in 2021.

drivers box -en Created with Sketch. EXPECTED GROWTH DRIVERS Investment to consumption Real estate & infrastructure to manufacturing investment

The Chinese economy has restructured steadily since the Global Financial Crisis (GFC) of 2008, with the growth driver shifting from exports to domestic demand. The service sector’s share of GDP has also risen persistently compared to that of manufacturing. Indeed, consumption has been the most important driver of growth in eight of the past nine years. The COVID-19 pandemic not only led to an abrupt contraction of the economy in 1Q2020, but also to a temporary disruption of the ongoing growth restructuring.

Upon successful control of the epidemic and counter-cyclical policy stimulus, the economy has recovered swiftly from 2Q2020 onwards, returning to the pre-pandemic growth path by the year’s end. Notably, the recovery has featured a unique “two-speed” recovery pattern. In particular, industrial production has recovered earlier and more powerfully, driven by policy-supported public sector investment, housing and auto demand, as well as surprising strength in exports. Consumer spending and the service-sector recovery lagged for most of the year.

What Can We Expect Following the 14th Five-Year Plan?

The 14th Five-Year Plan outlined a “dual circulation” policy, which places greater emphasis on business at home and shoring up the domestic loop. This does not mean a return to a closed economy, though. Instead, it is based on persistent economic reform, as well as further opening of the Chinese economy. Areas of opportunity include:

Innovation and security of supply chain are top priorities for the country. China has responded to the trend of technology decoupling with the U.S. through a process of innovation, establishing self-sufficiency in foundational technologies.

On the other hand, innovation is also the key to sustainable growth. China will need to move up in the value-added chain to achieve productivity gains.

The second area of opportunity focuses on policies to boost domestic consumption, including:

  • New urbanization
  • Income policy - boosting income growth and reducing income inequality
  • Improving the social safety net - reducing precautionary saving and encouraging consumption)
  • Population policy - relaxing birth control policies

In recent years, the urbanization strategy has shifted from a balanced one (developing small and mid-sized cities and enhancing their competitiveness and attractiveness), to a comparative advantage approach (developing metropolitan areas and city clusters).

Digitalization of the economy includes commerce, 5G, big data, AI, and their applications. E-commerce has grown rapidly in China and now accounts for about one quarter of total retail sales. The digitalization trend has accelerated since the outbreak of the pandemic and it has expanded from e-commerce to new areas, such as virtual meetings, online education, online grocery shopping, online medicine and digital currency.

China’s carbon neutrality target implies a huge opportunity for green investment. This covers several key areas, including renewable energy, changes in energy structure, updates to equipment, changes to current industrial processes, innovations in energy efficiency, as well as new technology in carbon capture and storage. Coal remains the dominant source of energy in China, though its share declined from 70.2% in 2011 to 57.7% in 2019. We expect oil and coal consumption will peak around 2025, gas consumption will peak around 2035, and renewable energy will eventually become dominant in China. According to the J.P. Morgan Equity Research team, China’s green investment could exceed 90 trillion yuan in the next 30 years.

When Will China Become the Largest Economy in the World?

Based on our estimates, the Chinese and U.S. economies will match in size around 2030, which means that the catch-up process is shortened by 3–5 years compared to our pre-pandemic forecasts.

China’s outperformance during recovery from the COVID-19 pandemic led to a widening growth diferential between China and the U.S. Strong fundamentals also appreciated the CNY against the USD. These two factors will have important implications for the top two world economies in 2021. Ultimately, this will shorten the time it takes China to surpass the U.S. as the world’s largest economy, according to our forecast.

Our forecast is based on the following assumptions:

Group 25 Created with Sketch.


China’s growth trends down linearly from 5.5% to 3.3% in the next 10 years, and the GDP deflator rises at a steady 3% p.a.

Group 3 Created with Sketch.


U.S. nominal GDP growth is steady at 4%

Group 3 Created with Sketch.


CNY depreciates against the USD by 10% in the next 10 years, i.e. USD/ CNY at 7.10 in the long run


Any deviation from these assumptions would afect the timeline of the catchup process.

Adapted from J.P. Morgan’s Economic Research Report “Ten questions about China in 2021”, January 8, 2021, by Haibin Zhu and -Grace Ng. –

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