China’s economy leaves a mixed picture in Q1

China’s leadership set its annual GDP growth target at 5 percent for 2024 during the Two Sessions gathering of China’s legislature, held in March. Growth got off to a good start as GDP expanded by 5.3 percent in Q1, compared to 5.2 percent in Q4 2023. But the economy is not yet out of trouble as key indicators show a mixed picture. After a good first two months, it lost momentum in March. Growth in Q1 continued to be driven by industrial production and manufacturing investment, rather than consumption, a pattern that is in line with the government’s economic policy priorities.

Government support for the economy is focused on stabilization rather than full-blown stimulus. Its policy objective is to develop new growth drivers for China’s economy as part of Xi Jinping’s transition towards his vision of higher-quality growth. The latest buzz words are around establishing “new productive forces” as part of Xi’s emphasis on innovation, high-tech and emerging technology.

Economic growth faces some challenges but - from the government’s perspective - it is still good enough. It was predictable that the transition to a new tech driven growth model would not be smooth. Despite the ongoing challenges in consumption or employment, the leadership seems relatively unconcerned. It is signaling its willingness to maintain a steady policy course and its commitment to the ongoing transition. The message: some economic pain in parts of society must be endured. There is no reason expect major stimulus or a return to the old growth model they are trying to leave behind.

Internationally, more tensions are looming despite efforts to woo foreign companies as happened at the China Development Forum attended by roughly 90 CEOs of major multinationals in late March. China’s major trading partners are growing concerned that the country’s alleged industrial overcapacities will lead to Chinese goods flooding global markets. China has a dominant position in green tech, from solar panels, wind power equipment, to batteries. Rising e-vehicle exports are certainly causing tensions. The EU has announced several investigations into dumping allegations and Brazil has launched a similar inquiry. China’s exports will need to weather the challenges and are likely to slow (though not drastically), providing the economy with less lift in 2024.

China’s real estate woes are one of the biggest challenges facing its economy. In the wake of the government’s crackdown on real estate developers’ bad debts, investment in the sector is stalled, which impacts economic growth, while falling housing prices are affecting consumer sentiment. Fallout from the real estate sector’s problems continued over Q1 2024 and has yet to stabilize. Consumer sentiment continues to be fragile, hurt by a weak labor market and lower wage growth.

The government’s economic policy has not changed much in the face of these domestic and international pressures. It is purposely limiting stimulus measures and prioritizing developing its new tech driven growth model. The leadership seems to hope that weak sentiment will subside eventually, once the economic transition makes progress. However, there is also a risk that growth momentum will stall further over the second quarter, which would increase the pressure to make more forceful adjustments. For now though, the government is holding a steady course. 

Macroeconomics: China’s GDP growth is off to a good start in Q1 2024

• China’s economy expanded more strongly than expected in Q1. Market forecasts had expected GDP to increase by 5 percent, but it grew by 5.3 percent year on year. Although higher GDP growth masks some challenges, such as weak consumption and deflation, the economy got off to a good start. While it is still early days, China’s Q1 performance makes the official 2024 growth target of around 5 percent look more attainable. (see exhibit 2). 
• Stronger than expected Q1 growth will curb expectations of more, expanded stimulus measures. The government’s policies will try to address shortcomings, most notably weak employment and foreign direct investment, but major support measures look unlikely for now. 
• Growth momentum further improved in Q1 putting growth on a more solid footing. Measured on a quarter on quarter basis, GDP expanded by 1.6 percent in Q1, up from 1.2 percent in Q4 last year.