Data released on Tuesday indicated that China’s economy expanded more quickly than anticipated in the first quarter, providing some respite to policymakers as they work to support growth in the face of persistent weakness in the real estate market and growing local government debt.

Nevertheless, a number of March indicators, such as retail sales, industrial output, and real estate investment, which were made public alongside the GDP figures, indicated that domestic demand was still fragile and was impeding the overall pace.

According to official figures, the second-largest economy in the world expanded by 5.3% between January and March of last year compared with the same period last year. This was significantly higher than the 5.2% growth in the previous quarter and comfortably beyond a 4.6% analysts’ prediction in a Reuters poll. Growth increased to 1.6% on a quarterly basis from 1.4% over the preceding 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.

The growth target Beijing hopes to achieve with the use of fiscal and monetary stimulus measures has been characterised by analysts as ambitious; they point out that last year’s 5.2% growth rate was probably exaggerated by a comeback from a COVID-hit 2022.

However, the property crisis, growing municipal debt, and sluggish consumer spending caused that bounce to fade.

To stimulate the economy, Beijing resorted to the time-tested methods of investing in high-tech industry and infrastructure. However, this sparked worries about the state of the public coffers, which led Fitch to downgrade China’s sovereign credit rating to negative last week.

Although the economy appeared to be off to a strong start this year, statistics on exports, consumer inflation, producer pricing, and bank lending for March suggested that the momentum could falter once more, leading to requests for additional economic stimulus. This was supported by the quarterly GDP data.

Alongside the GDP statistics, disappointing factory output and retail sales highlighted the ongoing weakness in domestic demand.

March’s industrial output increased by 4.5% over the previous year, less than the 6.0% predicted increase and a 7.0% increase from January to February.

Retail sales increased 3.1% annually in March, below the 4.6% growth estimate and decreasing from a 5.5% increase in January-February.

During the first three months of 2024, fixed asset investment expanded at an annual rate of 4.5%, above predictions of a 4.1% increase. In the months of January through February, it grew by 4.2%.

“While the headline number appears strong, I believe the momentum is a little weak at the end,” stated Alvin Tan, RBC Capital Markets’ head of Asia currency strategy 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.

China’s GDP is expected to rise 4.9% this year, according to ANZ economists, up from 4.2% last year. DBS Bank researchers increased their forecast for 2024 to 5% from 4.5%.

Deutsche Bank now projects 5.2% growth, which is half a percentage point higher than Societe Generale’s 4.7% growth estimate for 2024.

The data received a tepid response from the market.

The yuan was being steadied in the onshore market, according to traders, by China’s state-owned banks selling dollars. China equities were tracking weaker broader markets due to a decline in risk sentiment caused by geopolitical tensions in the Middle East.

China’s economy has been severely hampered by the real estate crisis as it has.

The severity of the property sector problem was brought to light by the March statistics, and it has had a knock-on effect on corporate and consumer confidence, investment plans, hiring decisions, and stock market performance.

Last month, China’s new home prices dropped at the fastest rate in almost eight years. In the first quarter, real estate investment declined 9.5% year over year, worsening a 9.0% decline in January and February. In contrast to a 20.5% decline in the first two months of the year, sales fell 23.7%.

China might also see a lengthier period of weak export growth, which would be a further setback to officials’ expectations of enacting a robust economic rebound, given that the Federal Reserve and other Western nations are not in a rush to start decreasing interest rates.

The growing trade, technological, and geopolitical conflicts between China and the United States present an additional difficulty for Chinese authorities.

April’s Politburo meeting is anticipated, and while few analysts anticipate any significant stimulus, it may provide hints about Beijing’s policy response.

Although the market anticipates that the central banks’ promises to strengthen their support for the economy this year would result in additional reductions to the reserve requirement ratio and interest rates for banks, several analysts caution that their ability to do so will be limited.

They claim that since credit is going to manufacturing rather than consumption, monetary policy tools that were previously used to boost demand and growth are now less successful.

“(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.

(Adapted from Reuters.com)

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