China GDP: five things to watch

China’s National Bureau of Statistics will release its estimate for first-quarter gross domestic product growth on Friday, with banner figures expected one year after the Covid-19 pandemic brought the world’s second-largest economy to a halt.

The country recorded a historic year-on-year contraction of almost 7 per cent in the first quarter of 2020, setting the stage for a dramatic rebound this year.

Exports in March were the most recent example of this “low base” effect, soaring more than 30 per cent compared with the same month last year, when China was under lockdown to contain coronavirus.

Here are five things to look out for in Friday’s release.

How big will the first-quarter bounce be?

Larry Hu, chief China economist at Macquarie, said first-quarter economic output was “on track to [expand] 18 per cent” year on year.

But this “first into the pandemic, first out” momentum will slow over the rest of 2021. China’s economy grew 6.5 per cent in the fourth quarter and 2.3 per cent for the entire year — making it the only major economy to expand in 2020.

Premier Li Keqiang announced a full-year growth target of “at least 6 per cent” at the annual session of the National People’s Congress, China’s rubber-stamp parliament, held last month in Beijing.

Why not aim higher?

Chinese financial officials, led by Liu He, vice-premier and the country’s most powerful financial official, are eager to rein in some of the stimulus measures that cushioned the economy but also reversed their success in stabilising China’s overall debt levels.

Liu’s team is determined to restore financial discipline. It has refused to embrace the “helicopter money” and other demand-side stimulus measures unleashed by major western economies such as the US.

The seriousness of their intent was highlighted in February, when the People’s Bank of China quietly instructed domestic and foreign lenders to keep first-quarter new loan growth flat compared with the same period last year.

Will they succeed?

Issuing diktats to China’s state-controlled banking system is often ineffective, even for powerful officials such as Liu.

President Xi Jinping has declared that “homes are for living in, not speculating on”, and China’s top banking regulator has singled out the property sector as the economy’s biggest “grey rhino” risk to stability.

But the country’s property boom has not abated. Real estate-related investment and loan growth were up 38 per cent and 14 per cent year-on-year in the January-February period, respectively.

Steel production also increased 6 per cent last year to a record 1.1bn tonnes. Government efforts to rein in the sector, which has exacerbated air pollution levels across northern China this spring, led to higher prices, which spurred more production.

Will consumption and services rebound?

China’s impressive economic recovery last year was driven by surging industrial production, while retail sales remained relatively weak. The service sector also bore the brunt of the pandemic.

This is the opposite of what Beijing would like to see, as it tries to rebalance the economy away from credit-fuelled industrial activity towards consumption. But this is proving to be very difficult. China recorded consumer price deflation in November of minus 0.5 per cent for the first time in more than 10 years.

What other constraints does Beijing face as it tries to rein in the recovery?

Xi’s administration does not want to apply the brakes too hard ahead of the centennial of the Chinese Communist party’s founding, which will be celebrated on July 1.

“The party will do ‘whatever it takes’ to prevent a downturn in the economy or a bad slump in the stock market from spoiling the run-up to [the] celebrations,” said Diana Choyleva at Enodo Economics. “After that, a renewed emphasis on reducing China’s debt burden will lead to tighter policy and liquidity conditions.”

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