China’s Q1 growth solid but weak spots remain

economy expanded at a quicker pace than anticipated in the first three months of the year, official data showed yesterday, supported by policies aimed at spurring growth and stronger demand, amid protracted weakness in the property sector and mounting local government debt.

However, several March indicators released alongside the gross domestic product (GDP) data – including property investment, retail sales and industrial output – showed that demand at home remains frail, weighing on overall momentum.

The world’s second-largest economy grew 5.3% in January-March from the year earlier, official data showed, comfortably above a 4.6% analysts’ forecast in a Reuters poll and up from the 5.2% expansion in the previous quarter.

Quarterly, growth picked up to 1.6% from 1.4% in the previous three months.

“The strong first-quarter growth figure goes a long way in achieving China’s ‘around 5%’ target for the year,” said Harry Murphy Cruise, economist at Moody’s Analytics.

Analysts have described the growth target Beijing aims to accomplish with the help of fiscal and monetary stimulus measures as ambitious, noting last year’s growth rate of 5.2% was likely flattered by a rebound from a COVID-hit 2022.

That bounce, however, fizzled away under the weight of the property downturn, rising local debt and weak consumer spending.

Beijing turned to the tried and tested spending on infrastructure and high-tech manufacturing to lift the economy. That, however, raised concerns about public finances, prompting Fitch to cut its outlook on China’s sovereign credit rating to negative last week.

WEAK MARCH DATA

While the quarterly GDP data showed the economy was off to a solid start this year, data on exports, consumer inflation, producer prices and bank lending for March showed that momentum could falter again, spurring calls for more economic stimulus.

Disappointing factory output and retail sales, released alongside the GDP report, also underlined the persistent weakness in domestic demand.

Industrial output in March grew 4.5% from a year earlier, below the 6% forecast and a gain of 7% for the January-February period.

Retail sales rose 3.1% year-over-year in March, missing the 4.6% growth forecast and slowing from a 5.5% gain in the January-February period.

Fixed asset investment grew an annual 4.5% over the first three months of 2024, versus expectations for a 4.1% rise. It expanded 4.2% in the January-February period.

“The headline number looks good... but I think the momentum is actually quite weak at the end,” said Alvin Tan, head of Asia currency strategy at RBC Capital Markets in Singapore.

Prior to the data, analysts polled by Reuters expected China’s economy to grow 4.6% in 2024, below the official target, but several banks raised their forecasts after the first-quarter numbers.

Economists at ANZ now see China’s economy growing 4.9% this year, up from 4.2% previously, while economists at DBS Bank lifted their 2024 outlook to 5% from 4.5%.

Societe Generale raised its 2024 growth forecast to 5% from 4.7%, while Deutsche Bank now expects 5.2% growth, half a percentage point above its previous forecast.

Markets showed muted reaction to the data. Traders said China’s state-owned banks were selling dollars to steady the yuan in the onshore market. China stocks were tracking broader markets lower as geopolitical tensions in the Middle East sapped risk sentiment.

CHALLENGES

The March data highlighted the depth of the property sector crisis, which has rippled across the broader economy, hitting business and consumer confidence, investment plans, hiring decisions, and stock market performance.

China’s new home prices fell at their fastest pace in more than eight years last month. Property investment fell 9.5% year-over-year in the first quarter, deepening its slump after a 9% drop in January-February. Sales tumbled 23.7%, compared with a 20.5% fall in the first two months of the year.

With the U.S. Federal Reserve (Fed) and other developed economies in no rush to start cutting interest rates, China may also face a longer period of subpar export growth, a further blow to policymakers’ hopes of engineering a strong economic recovery.

Adding to the challenge for China, authorities also have to contend with ongoing tensions with the United States over trade, technology, and geopolitics.

An expected Politburo meeting in April may give clues on Beijing’s policy response, though few analysts expect any major stimulus.

While markets expect the central bank’s pledges to step up policy support for the economy this year to bring further cuts in banks’ reserve requirement ratio and interest rates, some analysts warn there is a limit to how much they can accomplish.

They say that more credit is flowing to production than into consumption, reducing the effectiveness of monetary policy tools in stimulating demand and growth

“(The) recovery has not got a solid foundation yet as the deep adjustment of real estate market and local government debt overhang still remain the main risks,” said Jinyue Dong, senior economist at BBVA research.