China's First Quarter GDP Growth Astonishing, What Adjustments Lie Ahead?

　　Since the beginning of the year, China has been vigorously investing in manufacturing to stimulate growth, including the construction of numerous new factories, which has helped drive global sales of solar panels, electric vehicles, and other products.

　　Image Source: Fortune

　　Data released by the National Bureau of Statistics shows that China's Gross Domestic Product (GDP) grew by 5.3% year-on-year in the first quarter, exceeding economists' expectations of 4.6% to 4.8% growth. This also marks an acceleration from the 5.2% growth in the previous three months.

　　Image Source: Bloomberg

　　Sheng Laiyun, speaking at a press conference on data release held in Beijing, said that the Chinese economy had a good start in the first quarter, laying a solid foundation for achieving the annual target. However, he also admitted that the foundation for economic stability and improvement is still not firm.

　　However, retail sales in March only rose by 4.7%, with little increase compared to the same period last year, especially with weak performance in March. China needs strong consumer spending to reduce the persistently high youth unemployment rate and help businesses and households cope with high debt levels.

　　The core of China's growth is a remarkable surge in factory investment, which increased by 9.9% compared to last year. Strong exports at the beginning of this year also helped. However, the actual contribution of exports to the Chinese economy is far more than that, as falling prices mask the full extent of China's export earnings.

　　The government encourages increased consumer spending through street festivals and other activities, despite many Chinese people increasing their savings to offset the recent plunge in housing prices.

　　Persistent price declines remain a problem, especially for exports and wholesale. Chinese companies have been competing to lower export prices to gain larger shares of the global market, even if it means suffering huge losses.

　　At a high-level meeting with Chinese officials earlier this month, Treasury Secretary Yellen warned that a large-scale output of products to the market would disrupt supply chains, threatening industries and employment. German Chancellor Scholz expressed similar concerns during a visit to China, but also warned Europe to beware of protectionism.

　　China's bet on exports has caused concern for many countries and their companies. They fear that a large influx of Chinese goods into distant markets will disrupt their manufacturing industries, leading to layoffs.

　　China's “good start” in 2024 has shown signs of potential loss of momentum. Despite better-than-expected GDP growth announced by Beijing on Tuesday, data released by statisticians in March was disappointing, showing that the world's second-largest economy is still struggling with a real estate crisis and declining consumer confidence.

　　For years, housing construction, steel, glass, and other housing materials production have been the driving force behind China's economic growth.

Real Estate Downturn

　　China's real estate market has been in a long-term downturn, showing no signs of abating.

　　Image Source: BBC

　　In 2020, China passed regulations aimed at controlling debt, but this instead exacerbated developers' liquidity crises. Cash shortages have led many developers to default on overseas debts and halt construction of presold properties. Despite government attempts to stimulate housing sales by reducing down payments and interest rates, house prices continue to decline. The default event at the end of 2021 by Evergrande Group triggered the entire crisis, and the group is currently undergoing liquidation by the Hong Kong court. Other Chinese developers also face liquidation applications in Hong Kong, with China Evergrande even facing a liquidation application from Hang Seng Bank, a subsidiary of HSBC, on Tuesday.

　　The latest data shows that new home sales in the quarter fell by 30.7% year-on-year, while real estate investment also fell by 9.5% during the same period. The behind-the-scenes cause of this phenomenon is the consequences of the Chinese real estate industry's years of excessive borrowing.

　　According to the South China Morning Post, Vice Premier of the State Council He Lifeng said during a meeting with officials and bankers in Zhengzhou, China, that the real estate industry is “crucial” and urged more funding to meet developers' “on-time completion and delivery” requirements. Goldman Sachs analysts estimate in a report released on Sunday that the Chinese government may need to invest $2.1 trillion to address the real estate market problem.

Retail and Exports

　　Chinese consumer confidence continues to be low, a phenomenon caused by the long-standing real estate crisis. Data from the National Bureau of Statistics shows that total retail sales of consumer goods in March increased by 3.1%, lower than Reuters' general expectation of 4.6%.

　　However, data released on Tuesday showed that China's first-quarter growth was mainly driven by manufacturing. Industrial output in this quarter increased by 6.1% year-on-year. According to data released before the weekend, exports in the first quarter increased by 4.9% compared to the same period last year. However, separate export data for March showed a larger-than-expected decline.

　　At the same time, industrial output also shows signs of possible weakness. Data for March showed a growth of 4.5%, lower than economists' expected 6%.

　　China is currently committed to shifting its economy to high-value industries such as new energy vehicles, green energy, and semiconductors. However, China's development in these areas has aroused dissatisfaction among Western governments, including warnings from officials such as U.S. Treasury Secretary Janet Yellen that the “overcapacity” issue could become a focus of dialogue with Beijing.

Economic Imbalances

　　Most of the good news in manufacturing comes from China's “new three major” industries: electric vehicles, solar panels, and batteries. While other industries are not prominent, this economic mismatch is becoming increasingly apparent.

　　Harry Murphy Cruise, an economist at Moody's Analytics, said, “Officials have invested heavily in these strategic industries, and as global demand falls more broadly, production and exports (especially of electric vehicles) are booming, and they are reaping the rewards.”

　　However, this has increased concerns from the United States and the European Union that China's overcapacity in these areas is flooding global markets and hindering its domestic industries.

Loss of Confidence Among Foreign Investors

　　In the world's second-largest economy, confidence among foreign investors in China remains weak. Foreign investment was a significant driver of economic growth during China's economic boom.

　　Investment growth mainly came from state-owned enterprises, which increased by 7.8% year-on-year in the first quarter. Private sector investment increased by only 0.5%.

　　At the same time, foreign investment in China in the first three months decreased by 10.4%.