China, the world’s second largest economy, reported a stronger-than-projected economic growth of 5.3 per cent in the January-March quarter of 2024, despite challenges that range from a lingering property market downturn to the continued sluggishness in domestic demand.
The latest quarterly gross domestic product (GDP) print is sharply higher than the expectation of a 4.8-5 per cent growth projected by economists, and came in above the 5.2 per cent expansion recorded in the fourth quarter of last year.
The drivers of China’s economic growth
The latest numbers released by China’s National Bureau of Statistics on Tuesday (April 15) showed growth was propelled by an expansion in the country’s services sector, as well as upbeat external demand boosting export growth, especially in the industrial sector.
Fixed-asset investment grew by 4.5 per cent in the first three months of this year, essentially indicating government support to the growth story. This is despite the weakness in the month of February, when industrial production was disrupted by the Chinese Lunar New Year holidays. There are however question marks over how enduring the government support is likely to be over the coming months.
Amid the overall positives, the jobless rate in China has come in at 5.2 per cent for the month of March, which is remarkably low for an economy said to be undergoing a transition. The unemployment rate for 30 of its major cities came in even lower than the nationwide figure.
Potential headwinds
Economists contend that it is hard to come up with a consistent read through of the Chinese GDP data because there are multiple pressure points.
The trade friction with the US is a problem, with Washington having slapped higher tariffs on Chinese exports, a move that has progressively clouded Beijing’s trade forecasts. The slowdown in some economies of Western Europe, especially Germany, is yet another major economic risk factor for China.
Retail sales grew by 3.1 per cent in March on a year-on-year basis, compared with a combined growth of 5.5 per cent in January and February. This slowdown in consumption is a continuing worry for Chinese policymakers going forward, given how strongly retail sales are tied-in to the consumption story.
The problem is that for a lot of Chinese people, their investable surpluses are stuck in real estate investments that are now mired in delays. That, in turn, impacts their spending on goods and services.
China’s troubled property market, a key drag on GDP growth last year, continued to disappoint, with the investment decline in the sector deepening to 9.5 per cent in the first quarter on a year-on-year basis, compared to a slide of 9 per cent in the first two months of the year.
While some of the latest growth trends are being attributed by economists to an ongoing reallocation of investment from the country’s troubled real estate to manufacturing, the big question is whether this is likely to endure and if the government has the resolve and resources to continue doing the heavy lifting to drive up growth.
What needs to be kept in mind is that the total fiscal expenditures from the government is pegged at about 8.3 per cent of GDP this year, which is only marginally higher than last year, according to Moody’s estimates. So given that fiscal spending as a percentage of GDP is not that much higher, as per government projections, it might not really prove to be a major stimulus on a net basis in the coming quarters.
Broader impact
Any uptick in the growth figures of the world’s second largest economy would have its impact on global growth. An above 5 per cent growth for an $18.6 trillion economy is by no measure a small achievement. That is even more important given the context that China’s growth averaged 10 per cent a year in the three decades after its economic reforms in 1978.
The World Bank had forecast GDP growth in China at 5.2 per cent in 2023, before it slowed to a projected 4.5 per cent in 2024. The big challenge for Beijing, therefore, would be to keep the economic growth momentum at the January-March rate in the coming quarters, which looks tough.
China’s growth outlook is clouded by continued weakness in the real estate sector and an anticipated weakness in global demand over the short term. Add to this intrinsic structural constraints to growth, including high debt levels, population ageing, and slower productivity growth than in the past, and it looks a tad more challenging.
The big risks are: if the property sector downturn were to extend beyond initial expectations, impacting consumer sentiment and spending. This could have a cascading impact, putting pressure on suppliers, creditors, and local government revenues, and lead to a slide in public investment – a major factor that supported growth during the latest quarter.
Additionally, according to the World Bank, the Chinese economy is vulnerable to softer global demand and increased geoeconomic tensions. Climate change and the rising frequency of extreme weather events also pose a downside risk.
“There has been substantial reallocation of investment from real estate to manufacturing where returns are higher,” said Elitza Mileva, World Bank Lead Economist for China, in a December 2023 report. “A fair and competitive market and a predictable regulatory environment will ensure that capital flows to the most productive firms and sectors.”