China’s first-quarter gross domestic product data has thrown into stark relief the effects of President Xi Jinping’s bet that a manufacturing boom can help the world’s second-largest economy overcome a prolonged slump in the property market.
The National Bureau of Statistics on Tuesday reported a 6.1 per cent rise in industrial production and a nearly 10 per cent increase in manufacturing investment, which helped bolster a better than expected reading of 5.3 per cent gross domestic product growth year on year for the first three months of 2024.
But with property sales falling by double digits, analysts questioned whether policymakers’ concentration on fuelling supply instead of domestic demand would prove a sustainable plan for an economy suffering from low consumer and investor confidence and deflationary pressures.
“The drivers are pretty clear — more production and exports helped along with more investment on the manufacturing front,” said Hui Shan, chief China economist at Goldman Sachs.
Facing a three-year slide in the property market — which once accounted for a third of economic activity — and with many local governments heavily weighed down by debt, Xi is hoping that fuelling factory investment will keep the economy growing until domestic demand stabilises, analysts said.
Focusing on high-end production of electric vehicles, solar panels and batteries, the government is rolling out domestic subsidy programmes for companies to upgrade their equipment and for consumers to buy new cars and home appliances.
But China’s trading partners worry that the emphasis on manufacturing output over domestic demand might produce another “supply shock” for world markets similar to the one in 2015-16, when excess steel capacity spilled over globally after the country’s economy slowed.
To counter these arguments, officials assert that China’s green industries, which have benefited from sweeping subsidies and government protection, are the result of “market forces”.
After welcoming German Chancellor Olaf Scholz outside the Great Hall of the People in Beijing on Tuesday, China’s second-ranked official Li Qiang gave his guest a lecture on basic economics.
“Moderate production exceeding demand is conducive to full competition and survival of the fittest,” Li said, addressing EU concerns that China was planning to dump excess electric vehicle production. “The high-quality production capacity that China’s new energy industry continues to provide will make an important contribution to global green development.”
First-quarter data showed China’s export volumes rose sharply by 14 per cent year on year, even as the price index of those exports fell 12 per cent, according to Robin Xing, chief China economist at Morgan Stanley.
“Chinese exporters are providing huge price discounts on their exports because of domestic overcapacity,” Xing said.
Analysts said nominal GDP growth not adjusted for inflation was just 4.2 per cent. This means the GDP deflator — the broadest measure of price movements in the economy — remained in deflationary territory, another sign of excess capacity in the economy.
China’s industrial utilisation ratio, a measure of actual production compared with potential output, dropped to about 74 per cent in the first quarter, the weakest since the third quarter of 2016 excluding the period when Covid-19 broke out in 2020, Citi said.
“Domestic demand is weak, the property sector is collapsing, we have zero CPI inflation and producer prices are falling — all of this is good for exporters,” said Ting Lu, chief China economist at Nomura. “Imagine you are the exporter: there’s low wage growth, things are getting cheaper. Of course, it will make you more competitive in the global market.”
But he added that the “relatively decent export growth” was not enough to offset the property slowdown, which he expected to last for another few quarters.
Property remained a deadweight during the first quarter, with sales falling 19.4 per cent year on year in terms of area and 27.6 per cent in terms of value. In March, retail sales also softened compared with January and February.
The stronger first-quarter GDP reading “[appeared] to validate the government’s strategy to channel resources into manufacturing and rely on external demand”, said Wei He of Gavekal Economics. “However, the March figures still do not show a convincing domestic upturn.”
Most economists believe the manufacturing boom, coupled with infrastructure investment and other stimulus measures, could raise GDP growth to the government’s target of 5 per cent this year.
Rising protectionism in developed markets will also take time to take effect, and Chinese companies have proved adept at avoiding tariffs by channelling goods through other markets, analysts said.
But with the property sector expected to remain weak in 2025, Beijing might need to set a lower GDP target next year, Goldman’s Shan said.
“That combination — you set a target for slower growth, step up infrastructure investment and count on continued strength in manufacturing — might be enough to get you through this period of property sector adjustment,” she said.
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