China’s GDP: five things to keep in mind

China’s first-quarter economic rise was primarily a reflection of the hardship the world’s second-largest economy suffered from the Covid-19 pandemic early last year, rather than the strength of its recovery.

While the gross domestic product grew more than 18 percent year after year, between January and March, its increase compared to the last quarter of 2020 was 0.6%.

China is expected to release an 8% year-on-year figure on Thursday, when the National Bureau of Statistics reveals its second-quarter growth estimate. However, it will focus on the signs of economic slowness and whether they are worrisome enough for the government to adjust policy.

Here are five things to keep in mind after Thursday’s announcement.

Will industrial production and investment growth in fixed assets slow down?

China’s economy received a big boost from industrial production, up 24.5% year-on-year in the first quarter, and investment in fixed assets, which rose 25.6% year-on-year in March.

Both are associated with the debt-driven “low-quality” growth model, led by Chinese officials Liu He, the deputy prime minister, wants to stay away but tolerated to help the country recover from the pandemic. In recent months they have softened. Growth in industrial production rose 15.4% year-on-year in May, while annual increases in investment in fixed assets fell below 10% in both April and May.

Will China enter a new cycle of relaxation?

The People’s Bank of China on Friday lowered the amount of reserves banks have to hold at 50 basis points, to an average of 8.9%. It was the first such reduction since March 2020.

Analysts are divided on whether the central bank will now accelerate monetary easing. Wei Yao, an economist at Société Générale, believes so. “This tool is never used when the economy is working well,” he noted, adding that there is likely to be another reduction in reserves before the end of the year, as well as a possible reduction in interest in 2022.

Others, however, consider the central bank when it said last week’s reduction in reserves was intended primarily to offset liquidity as medium-term lending facilities expire.

“The main goal of the cut is to reduce business costs by reducing costs for banks,” said Larry Hu, China’s chief economist at Macquarie. “It simply came to our notice then [the] cut indicates a new cycle of relaxation or a worse-than-expected economic slowdown. “

Will Liu’s goal of containing financial risks outweigh concerns about the economic downturn?

The reduction in PBoC reserves came just two days after the state council, China’s cabinet, urged it to do so. But the central bank had ignored a similar call from the government in June 2020, signaling the ever-present tension between officials concerned about financial risks and those most concerned about fueling growth.

Those at Liu’s camp are concerned that weaker monetary policy could drive reckless borrowing, which contributed to a wave of default values in two of China’s largest industrial provinces last year. The largest in China bad debt manager and some of the country’s top real estate developers are also struggling to restructure their debts.

“China is running out of time to deal with its mountain of bad debts and resulting financial risk,” Diana Choyleva told Enodo Economics, adding that 2021 would likely be “a clearly binary year” for the world. Chinese economy.

But supporting economic growth is always a priority during crises such as the pandemic, as well as in the face of important political events such as the Chinese Communist Party. celebration of its centenary this month. This tension will continue as the party tries to strike a balance between boosting growth and reducing financial risks ahead of next year’s twentieth party congress, in which President Xi Jinping is expected to begin an unprecedented third term in power.

Will local government spending restrictions be relaxed?

A sign of who wins the policy argument will be the issuance of bonds and investment by local government funding vehicles, which play a central role in infrastructure investment.

Overall infrastructure investment fell 3.6% year-on-year in May, the first annual drop since Wuhan’s Covid outbreak last year halted much of the Chinese economy. The issuance of special purpose bonds amounted to only Rmb1,2tn ($ 186 billion) during the first five months of this year, compared to Rmb2,3tn during the same period last year.

Will China’s Covid strategy slow growth?

While China is on track to completely vaccinate 70% of its population by the end of the year, it shows no sign of abandoning its “zero covid” approach to the pandemic. This is likely to restrict inbound and outbound travel to insignificant levels until at least until next year’s Beijing Winter Olympics, and will also take extreme measures whenever outbreaks occur. The draconian response to a recent one accumulation of infections in one of the largest ports in the country caused a huge disruption for exporters.

It is recalled that while China has successfully contained the pandemic, its impact on some sectors of the economy will continue to be felt until next year, if not more.