China’s GDP Grows by 12.7% in H1 2021

China’s economy continues to recover from the COVID-19 pandemic but growth is uneven, according to newly released economic data covering the first half of 2021. On July 15, 2021, the National Bureau of Statistics announced that China’s GDP grew by 7.9 percent in the second quarter of the year, compared to the same period the previous year.

Overall, China’s GDP increased by 12.7 percent through the first half of 2021, putting the country on track to meet its growth target of “over 6 percent”. Last year, China’s economy grew by 2.3 percent, making it one of the few major economies to register positive growth amid the pandemic.

China has carried this momentum through the first half of 2021, but internal and external challenges will require the government to respond with policy solutions to sustain growth through the rest of the year.

GDP growth slightly below expectations

China’s second quarter GDP growth of 7.9 percent, covering the months of April to June, fell somewhat short of economists’ expectations. A Caixin survey of economists expected second quarter growth to come in at 8.2 percent, while Reuters estimated 8.1 percent growth.

Second quarter growth was down from the rapid 18.3 percent growth in the first quarter, which reflected the low base caused by the COVID-19-related disruption in early 2020. In the first quarter of 2020, China’s economy contracted by 6.8 percent, as the economy came to a standstill as the pandemic emerged.

In cumulative terms, GDP increased by 1.3 percent compared to the first quarter of 2021. While this was more than double the first quarter’s growth rate of 0.6 percent over the fourth quarter of 2020, it lagged the fourth quarter’s growth of 2.6 percent over the previous one.

Quarterly GDP growth in China during the pandemic

• Q1 2020: -6.8%
• Q2 2020: 3.2%
• Q3 2020: 4.9%
• Q4 2020: 6.5%
• Q1 2021: 18.3%
• Q2 2021: 7.9%

China’s growth rates in 2021 appear significantly larger than the usual increases of around 6-7 percent before the pandemic, as economic contractions affected the base used for comparison. Accordingly, combining the previous two years offers another perspective to interpret China’s economy compared to pre-pandemic levels.

The average compound growth rate in the second quarters of 2020 and 2021 was 5.5 percent, and 5 percent for first quarters of 2020 and 2021. The compound growth rate of the fourth quarter of 2020 and the fourth quarter of 2019 – before the pandemic – was 6.5 percent.

Put in context, China’s GDP growth suggests that the country has rebounded well from the pandemic-induced disruption, but is not yet firing on all cylinders.

Mixed growth indicators

Other economic indicators show mixed performance, as most areas gradually return to pre-pandemic levels but some show vulnerabilities.

Retail consumption was responsible for 61.7 percent of GDP growth through the first half of the year. Retail sales of consumer goods, a proxy for household spending, increased by 23 percent compared to 2020 levels and 9 percent compared to pre-pandemic 2019 levels. However, they slowed from 33.9 percent growth in the first quarter to 13.9 percent in the second.

Of total retail sales, 23.7 percent came from retail sales of physical goods in the first half of the year. Online sales continued to grow following increased adoption amid the pandemic, rising by 23.2 percent. In June, retail sales rose by 12.1 percent year-on-year, in part due to increased online shopping. This growth, however, is also partly attributable to higher prices from soaring commodity costs.

Auto sales continued to struggle, as consumers held off on big-ticket purchases. Although auto sales grew by 27 percent in the first half of 2021 after collapsing during the first half of 2020, sales were still below pre-pandemic levels. Compared to 2019, vehicle sales declined by 4.4 percent, according to the China Association of Automobile Manufacturers.

Meanwhile, industrial production growth declined from 24.5 percent in the first quarter to 8.9 percent in the second. Fixed asset investment increased by 12.6 percent in the first half of the year, while infrastructure investment grew by 7.8 percent.

Although China has for the most part kept COVID-19 under control, the tourism sector continues to struggle. The country’s borders are still essentially closed to non-residents, while domestic travel has not yet returned to pre-pandemic levels. In June, passenger rail travel declined by 19.9 percent compared to June 2019, before the pandemic.

In contrast, the food and beverage industry – another sector strongly impacted by the pandemic – has successfully rebounded, with revenue growing by 48.6 percent to nearly return to pre-pandemic levels.

What to expect in the second half of 2021

Liu Aihua, a spokesperson for the National Bureau Statistics, sounded cautious optimism in her remarks introducing the statistics.

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“In the first half of this year, the economy continued to recover steadily,” Liu said. “The cycle of supply and demand was smooth. The fundamentals laid a relatively good foundation for economic operation in the second half of this year.”

Liu cautioned, “However, it should also be noted that the pandemic continues to evolve globally, and there are many external uncertainties. The recovery of the domestic economy is uneven, and we still need efforts to consolidate the foundation for recovery and development.”

China’s GDP announcement was accompanies by a relaxation of banks’ reserve requirements, in a bid to boost investment. The decision released RMB 1 trillion (US$155 billion) of liquidity into the economy.

External challenges that could negatively impact China’s second half economic performance include trade disruptions and weak demand because of the pandemic, as well as soaring prices for commodities and key technologies like semiconductors.

Internally, challenges to growth include weak consumption, especially for large purchases, as consumers take a cautious approach to spending amid economic uncertainty and slowing wage growth. While this is a long-term challenge, it is particularly pressing in the short-term, as household spending has not yet returned to pre-pandemic levels amid stagnating income growth and a weaker than usual job market.

Additionally, Chinese regulators are continuing their campaigns to crack down on debt and rein in tech giants, creating more uncertainty in the economy.

Although China’s economy faces headwinds in the second half of the year, it appears on track to maintain its moderate level of growth. The World Bank released an estimate in June projecting China’s GDP growth to hit 8.5 percent for 2021, before slowing to 5.4 percent in 2022.

China’s growth outlook for the remainder of 2021 therefore appears cautiously optimistic, as China will continue to lead the global economic recovery but also face a number of challenges in sustaining growth.

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