China is testing growth

The Chinese economy after the removal of most coronavirus restrictions is recovering at a slightly faster pace than expected, but it is too early to talk about sustainable growth, according to data from the National Bureau of Statistics of the PRC. GDP growth and retail sales in the first quarter exceeded analysts’ expectations, but in terms of investment and industrial production, on the contrary, they fell behind forecasts. Increased attention to the pace of “revival” of China is due, among other things, to the fact that world economic growth this year, according to the forecasts of IMF experts, will be provided by the countries of the Asia-Pacific region by more than two-thirds.

In the first quarter of 2023, the Chinese economy grew by 4.5% compared to the same period in 2022 and by 2.2% compared to the previous quarter. The acceleration, according to the National Bureau of Statistics of the PRC, was facilitated by the growth of exports. However, according to a number of analysts, the improvement in export performance will not become a trend after all – now it is mainly due to the fact that at the beginning of the year, suppliers were fulfilling orders that could not be fulfilled earlier due to coronavirus restrictions. Recall that the main restrictions, which in 2022 led to a slowdown in China’s economic growth to 3% instead of the expected 5.5%, were canceled at the end of last year in connection with the revision of the “zero tolerance” policy towards the coronavirus. In January, the authorities also lifted the ban on entry into the country.

Now the official goal of the PRC authorities in terms of the country’s GDP growth dynamics in 2023 is about 5%. However, as IMF experts, as well as the influential resource Trading Economics, expect, the removal of most restrictions and stimulating policies after the exit from the pandemic could lead to more serious GDP growth this year. It, however, according to their estimates, may slow down in 2024.

In many ways, China’s economic growth in the first quarter was driven by the growth in retail sales, which accelerated to 10.6% in March instead of the expected 7.4% (this is the highest rate since June 2021). In March, retail sales of cars increased by 11.5%, jewelry by 37.4%, clothing by 17.7%, and cosmetics, tobacco and alcohol by 9.6%. In annual terms, the growth of retail sales for the first quarter amounted to 5.7%. In addition to pent-up demand, provided by the savings accumulated by citizens during the pandemic, the growth in consumer activity is explained by the low base effect – low figures for the same period last year.

Accelerated in the first quarter and the growth rate of industrial production in China. Compared to the same period in 2022, industrial production growth amounted to 3%, which, however, turned out to be lower than analysts’ expectations. Worse than forecasts and indicators for investment growth. In January-March, growth was 8.8% year-on-year and 5.1% quarterly. Real estate investment fell 5.8% year-on-year. This may partly be explained by the fears that persisted at the beginning of the year of a new wave of COVID-19 after the lifting of coronavirus restrictions.

It should be noted that the PRC authorities call the increase in investments one of the main goals for this year – this includes attracting private capital to participate in large national projects (for more details, see Kommersant on March 6). Without an improvement in investment and industrial production, analysts have doubts about the further recovery of the Chinese economy.

We note that the shift from investment-driven growth to consumer-driven growth during the pandemic explains the current limited impact of China’s reopening on the performance of the Asia-Pacific region as a whole. However, it is precisely with the Chinese “impulse of recovery”, which other countries of the region are waiting for, that the improvement in IMF forecasts for Asia is associated. Now fund analysts believe that its contribution to global economic growth in 2023 could be up to 70% (see Kommersant dated April 18).

Christina Borovikova