A deep dive into China’s expectations-beating GDP growth

CHINA’S GDP grew 5.3 per cent year on year in the first quarter, surpassing market expectations of 4.9 per cent and the previous quarter’s 5.2 per cent, indicating the economic recovery was accelerating.

There was, however, the matter of a notable slowdown in the year-on-year growth figures for consumption, exports and industrial production in March as compared with the first two months of the year.

This was primarily due to contrasting base effects from 2023. The Omicron outbreak that struck after China scrapped most of its pandemic restrictions at the end of 2022 took a toll on the economy in the first two months of last year.

This created a low base that benefited this year’s growth figures for consumption, exports and industrial production for the January to February period. Conversely, the surge in demand that occurred after the outbreak subsided in March 2023 created a high base that hurt those same figures last month.

Still, China’s economic recovery has been patchy. This has been reflected in the macroeconomic data in the first quarter, with the following three aspects deserving attention: persistent low prices, stronger-than-expected infrastructure investment, and weak credit and social financing.

What’s keeping prices down?

China’s nominal GDP growth rate of 4.2 per cent in the first quarter was considerably below the real growth rate, mainly dragged down by weak prices.


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The consumer price index remained unchanged year-on-year in the first quarter, while the producer price index fell 2.7 per cent. This was because supply outpaced demand, leading to higher output and lower prices.

On the demand side, services consumption and investment in infrastructure and high-end manufacturing were major drivers of economic recovery. However, goods consumption remained sluggish, and the protracted real estate slump weighed on the sector’s investment.

On the supply front, some industries faced temporary imbalances between supply and demand. Several emerging industries expanded rapidly, with capacity growing at a faster pace than market demand. This was exemplified by the price war in China’s new energy vehicle industry.

During the pandemic, overseas demand increased significantly, which helped absorb some domestic capacity. With demand from abroad now back to normal, domestic demand has yet to effectively fill the gap.

Why has infrastructure investment grown faster than expected?

The market had expected infrastructure investment would be low in the first quarter for two reasons.

The first was the fiscal constraints on local governments, with some localities classified as high-risk in terms of their debt burdens restricted from investing in infrastructure. Local governments across the board reported plunging land sales revenue as the real estate market remained sluggish.

The other reason was the first quarter saw slow progress in local government special-purpose bond issuance coupled with a decline in local government financing vehicles’ (LGFVs) net financing from bonds.

However, broad infrastructure investment grew 8.8 per cent year-on-year in the first quarter, up 0.6 points from the whole of last year, driven primarily by investments in power, railway and water conservation projects.

In January, the Ministry of Transport introduced the idea of adopting a proactive investment strategy for railway infrastructure this year. Investment in the railway transportation sector grew by 17.6 per cent year-on-year in the first three months.

Construction of water conservation projects, meanwhile, was a key target of the additional one trillion yuan (S$192 billion) in treasury bonds announced late last year. Investment in water management industries grew by 13.9 per cent year-on-year in the first quarter.

Those investments rely more on central government funds. In contrast, public facility management investments, which are mainly funded by local governments, fell 2.4 per cent year-on-year in the first quarter.

Why are credit and social financing weak?

People’s Bank of China figures show that the incremental amount of total social financing was down 1.6 trillion yuan year-on-year in the first quarter.

The slowdown in credit growth was a result of structural changes in financing entities. The services sector and emerging manufacturing industries are the backbone of China’s economic recovery at this stage. However, they have less financing demand and get less of their financing needs met than real estate companies, local governments and LGFVs.

While real estate developers are constrained by the market downturn, local governments and LGFVs face greater scrutiny from the central government, which is focused on resolving their debt issues.

Additionally, the slow issuance of local government special-purpose bonds also dragged on the overall social financing. CAIXIN GLOBAL

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