Devil in the detail: Why China’s recovery remains on shaky ground

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There is a patchiness to this week’s unexpectedly strong economic growth numbers that makes it difficult to assess whether China’s 4.6 per cent first-quarter GDP growth is sustainable.

There was always going to be a strong bounce in the March quarter, given the “base effects,” or the comparison with last year’s “zero COVID” affected economy, where the harsh policies implemented by Xi Jinping in response to the pandemic saw the weakest annual economic growth in China for a quarter of a century.

Questions remain over whether China’s recovery is sustainable.Credit: AP

Driven by unexpectedly strong consumer spending, mostly on hotels, restaurants and travel, however, the outcome bettered external forecasts of 4 per cent growth and suggests that Beijing’s modest (by China’s standards) full-year target of 5 per cent growth is easily attainable.

It might also suggest that the long-awaited rebalancing of the economy, tilting away from the long-standing export model to a greater emphasis on consumption, might be getting underway.

Given how early in the post “zero COVID” environment it is and how significant the base effects are, however, there’s nothing definitive in a quarter’s numbers.

It’s also worth noting that there was also a surge in exports, which were up 14.8 per cent, aided by a big increase in exports to Russia and higher electric vehicle sales, although there may have been an element of a catch-up of orders that weren’t fulfilled during last year’s COVID-disrupted factory activity.

With the US economy, China’s largest export market, slowing in response to the long series of Federal Reserve interest rate rises and the availability and cost of credit impacted by the recent bank failures and its next biggest market, Europe, spluttering as a result of the war in Ukraine, the sustainability of China’s export growth is also open to question.

China’s economic agencies have the same doubts about the implications of the first quarter activity, with the National Bureau of Statistics saying that the first quarter was “a good start” but domestic demand remained inadequate and “the foundation for economic recovery is not solid yet.”

Those concerns about the solidity of the recovery are borne out by the detail of the quarter’s activity.

Retail sales might have been up 10.6 per cent March on March and 5.8 per cent for the quarter but most of the increase was leisure and hospitality-related from a population that was released from the severe zero-COVID restrictions very late last year rather than on bigger ticket goods.

Industrial production was up 3.9 per cent in March, an acceleration from the 2.4 per cent growth experienced in the first two months of the year but fixed asset investment, which usually benefits from any government efforts to stimulate growth, slowed from 5.5 per cent in the first two months of the year to 5.1 per cent.

China still has a major unemployment problem.Credit: Getty

There’s also a noticeable (but probably not surprising) disparity between what China’s state-owned and private sector businesses are doing.

The state-owned businesses increased their investment (no doubt with encouragement and some financial support from Beijing, local governments and state-owned banks) by 10 per cent. The private businesses, which suffered last year not only as a result of the response to COVID but a broad crackdown on private enterprise, lifted their investment by only 0.6 per cent.

China’s property industry appears to be stabilising, at low levels, after the implosion that followed the authorities’ introduction of limits on developers’ leverage in 2020.

Property investment (which includes housing, offices and retail stores) fell 5.8 per cent in the quarter, with home sales down 1.8 per cent and new housing starts 19.2 per cent.

Housing sales are just starting to pick up but there is a massive over-hang of completed but unsold apartments that could weigh on the market for some years. On some estimates about a third of the apartments completed last year have yet to be sold.

The depressed state of the property market flows, not just into development and investment but all the sectors that service developments. Sales of household appliances, for instance, were down 1.4 per cent in March relative to the same month last year.

China also has a persistent unemployment problem. The urban jobless rate was 5.3 per cent in March but youth unemployment (16 to 24-year-olds) rose from 18.1 per cent in February to 19.6 per cent in March.

How China’s economy fares this year – whether it continues to growth at or better than the rate established in the first quarter – is important for the rest of the world and resource exporters like Australia in particular.

Without a broadening of the base of economic activity, particularly a structural increase in consumption and a strong return to growth in manufacturing, that will remain a challenge for the government and its Communist Party leadership and their ability to generate sustainable growth and maintain social stability.

The other challenge is the intensifying trade confrontation with the US and, to a degree, its allies. The US has progressively increased sanctions and restrictions designed to limit China’s access to semiconductors and other key inputs to advanced technologies.

China’s production of semiconductors was down almost 15 per cent in the first quarter, its production of microcomputing devices was down 21.6 per cent, mobile phones 6.7 per cent and integrated circuits 3 per cent.

The Biden administration’s efforts, with some help from its allies in Europe and Asia, to stymie China’s ambition of challenging the US for global technology supremacy, an ambition that straddles both commercial and military objectives, appears to be increasingly effective.

China’s embattled property market is showing signs of stabilising but it remains vulnerable.Credit: Bloomberg

Last month Xi foreshadowed a tightening of the government/party control of its science and technology (and financial) sectors.

While Beijing has been cautious in injecting stimulus into an economy laden with debt, it has earmarked its technology sectors, and the semiconductor industry in particular, for major financial support over the next few years, planning to spend more than a trillion yuan ($220 billion) over the next five years to try to create self-sufficiency in chip production.

How China’s economy fares this year – whether it continues to growth at or better than the rate established in the first quarter – is important for the rest of the world and resource exporters like Australia in particular.

China has been the biggest contributor to global economic growth for the best part of two decades and especially since the 2008 financial crisis. Its levels of domestic investment in property and infrastructure drives global demand for commodities like iron ore, coal, LNG and copper.

Its continuing reliance on exports, America’s trade and technology restrictions and the “reshoring” and “friendshoring” of investment and activity that has been occurring since the pandemic and the fractures in the relationships between the US and China does mean, however, that its economic model and its growth rates are exposed and vulnerable to global influences, none of which look particularly positive at present.

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