China’s 1st Quarter Growth Beats Estimates, but Economy Still Struggles: Analysts

Electric cars for export waiting to be loaded on the "BYD Explorer NO.1," a domestically manufactured vessel intended to export Chinese automobiles, at Yantai port, in eastern China's Shandong Province, on Jan. 10, 2024. (STR/AFP via Getty Images)

News Analysis

China’s economy surpassed expectations in the first quarter of 2024, offering some relief to policymakers grappling with prolonged weakness in the property sector and mounting local government debt. However, analysts say that the March indicators paint a different picture.

Despite the strong start for the year, analysts said that property investment, retail sales, and industrial output have shown signs of weakness. These poor high-frequency indicators reveal a faltering economy with fragile domestic demand, they noted, adding that sustaining the current growth may require additional policy support, given that maintaining overall economic momentum is still challenging.

Against the backdrop of ongoing challenges, analysts reckon that the full-year GDP may fall below 4 percent.

“Despite a better-than-expected Q1 [first quarter] GDP print, we don’t think China’s economy will be able to sustain this momentum in the absence of stronger policy support,” wrote Carlos Casanova, senior economist at Asia Macro Digest, in a client note viewed by The Epoch Times.

Nomura analysts wrote in a note: “[China’s] GDP surprised to the upside, [even as] March data shocked on the downside.

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“The Q1 growth reading also leaves some space for reporting slower GDP growth readings over the rest of the year.”

Official data released on April 16 revealed that the world’s second-largest economy exceeded expectations, expanding at an annual pace of 5.3 percent from January to March. This surpassed analysts’ forecasts of approximately 4.8 percent. Compared to the previous quarter, the economy experienced a growth of 1.6 percent.

Last month at the Chinese Communist Party’s (CCP’s) “Two Sessions” meetings, Beijing unveiled an ambitious growth target of approximately 5 percent for the year ahead, alongside a set of measures aimed at revitalizing its sluggish economy.

However, data from the National Bureau of Statistics revealed a worrying trend: first-quarter retail sales growth, a critical indicator of China’s consumer confidence, dipped to 3.1 percent.

Lynn Song, chief economist at ING, commented in a note, stating, “As anticipated, following the growth momentum of 2023, the March data underscores the difficulty of relying solely on consumption to drive growth this year.”

Likewise, property investment during the same period reported a major decline of 9.5 percent, underscoring the challenges confronting China’s real estate sector.

As China grapples with a continuing real estate crisis, recent numbers highlight the gravity of the situation. According to the estimates, the real estate industry accounts for over a third of the economy.

Adding to the concern, recent data also show that new house prices fell sharply in March, while home delivery progress lost some momentum at the start of 2024. New home completions recorded the first negative print since January–February 2022.

The gravity of the property sector crisis was highlighted in January when Evergrande was ordered by a Hong Kong court to liquidate. This upheaval spread to other large developers, with Country Garden and Shimao Group also facing winding-up petitions.

“It may still take several months before real estate activity indicators stabilise, and we expect a slow recovery once that inflexion point is achieved,” wrote Mr. Casanova.

To make matters worse, credit rating agency Fitch downgraded its forecast for China on April 9, citing rising threats to the country’s finances amid its economic problems.

‘Not Out of the Woods’

“It is clear that China is still not out of the woods,” said HSBC Global Research in a note viewed by The Epoch Times.

According to the British financial services group, the base effects are expected to persist, potentially dampening year-on-year momentum in sectors such as retail sales and services as China enters the second quarter.

Moreover, the recent disappointing export data, coupled with uncertain global demand, has created a lack of visibility regarding when the ongoing economic challenges will subside, the HSBC note added.

Overcapacity Concerns

Analysts also worry that Beijing’s focus on manufacturing production during the “Two Sessions” may exacerbate overcapacity issues.

According to Natixis Research, rather than focusing on foreign investors’ expectations to support China’s struggling domestic economy, policymakers emphasized the supply side and reiterated the country’s renewed push to become the “world’s factory” across sectors, including cutting-edge sectors like chips and brain-computer fusion.

“China’s new productive forces risk overcapacity bubble,” Natixis said in a note, adding that with declining export prices and stagnant export growth, the absorption of China’s additional manufacturing capacity in the global markets remains uncertain. This uncertainty adds to the challenge of achieving policymakers’ ambitious 5 percent GDP growth target.

“China’s 5 percent growth target in 2024 will thus be harder to achieve than it was last year,” according to Natixis.

Nomura forecasted a decrease in GDP growth to 3.7 percent for the entire year, compared to a Reuters poll predicting 4.6 percent.