Recently, the Communist Party of China (CPC) has officially released a number of economic data showing growth, especially in the first quarter when gross domestic product (GDP) reported double-digit growth. However, the market is more concerned about whether China’s economic growth is sustainable after removing the lower comparative base.
According to the China Statistics Bureau, China’s economy grew 18.3% year-over-year in the first three months of the year. While that number is quite impressive, it was set off in large part by numbers from the same period last year, when China’s economy was mired in a new crown epidemic and GDP fell 6.8% year-over-year in the first quarter of 2020.
Economists at HSBC estimate that GDP grew by about 5.4% year-over-year in the first quarter of this year, after taking out the effect of last year’s lower base, which is below the 6% growth average of the past few years.
From a chain growth perspective, China’s economic growth is also not promising. On a seasonally adjusted basis, GDP grew 0.6% in the first quarter of this year compared to the fourth quarter of 2020. This compares with average chain growth of around 1.8%-1.9% in the first quarter prior to the epidemic.
Analysis suggests that China’s economy will still not be able to run at full speed in the coming months, not only because of the lingering effects of the epidemic, but also because of the continued weakness of China’s domestic consumption, rising debt levels, increased geopolitical risks and an aging population.
Sluggish domestic consumption
According to the Communist Party’s official vision, China wants to achieve an internal circulation-based, domestic and international development model, which requires a focus on boosting consumption, but the current lack of domestic consumption is still prominent.
The average household propensity to consume for Chinese residents was 61.4% in the first quarter of this year, compared to 65.2% in the first quarter of 2019, according to data from BNP Paribas Investment Management. This means that China’s consumption growth has not yet returned to pre-epidemic levels.
There are a number of factors that have dampened domestic demand, including the recurrence of new crown outbreaks. When new cases emerge, the Chinese government tends to take a broad-brush approach, even blocking cities through administrative orders, largely affecting residents’ consumer confidence and business restart plans.
Alicia Garcia, chief economist for Asia Pacific at BNP Paribas, wrote in a research note: “Whether China’s economy can fully recover more quickly in the future, and especially whether consumer spending can fully catch up with income growth, also depends on the progress of vaccination within the country. Given China’s large population, vaccination rates remain low as of the first quarter.”
During the new crown pandemic, Chinese residents’ incomes have been affected to varying degrees and have also taken on more debt for expenses. Because China’s social security system is not yet well developed, some households tended to boost their savings further to cover future health care expenses after the pandemic, even though China already has one of the highest savings rates in the world.
Unlike most developed countries, the Chinese government did not choose to directly subsidize consumers or use check handouts to help small and medium-sized enterprises affected by the epidemic, but mainly used tax breaks.
On top of the epidemic, China’s aging population will also be a long-term influence in dampening demand. A recent article published by the People’s Bank of China notes that the share of the elderly population in the total population has risen from 7% in 2000 to nearly 13% in 2019 and could reach 14% by 2022.
According to Cai Fang, an advisor to China’s central bank, China’s total population will peak in four years, which will be the beginning of a significant decline in consumer demand.
In a recent opinion piece, he said, “When the total population enters negative growth (in 2025), there will be a demand shortage.”
Escalating Tensions
In addition to GDP growth, Chinese Communist Party officials last week released strong trade and investment data, with China’s imports and exports both growing at more than 30 percent year-on-year in March, the highest growth rate since February 2017. Foreign direct investment also recorded a sharp increase.
But analysts say it is feared that China’s exports will struggle to stay strong as the base effect subsides and overseas production resumes.
Dr. Ning Zhang, senior China economist at UBS Global Research, predicted in a research note: “Export growth is likely to slow further as the base effect starts to become less favorable, especially with the exceptionally high base of new crown-resistant products and electronics”
In addition, China’s tendency to weaponize trade has led to tensions with several countries in the context of escalating U.S.-China tensions. The external uncertainty casts a shadow over China’s trade outlook and adversely affects its economic growth rate in the medium term.
Developed countries such as the United States and Japan have committed to reducing their dependence on China’s supply chain. The U.S. Senate Foreign Affairs Committee recently introduced the Strategic Competition Act of 2021, which sets out programs to help U.S. companies withdraw from the Chinese market and seek to diversify their supply chains.
International tensions will also affect China’s ability to absorb foreign investment in the long term. In recent days, China’s business environment has become increasingly politicized, with official support for popular attacks on foreign companies that have expressed concern about forced labor in Xinjiang.
Gary Hufbauer, a trade expert at the Peterson Institute for International Economics, told Voice of America, “Foreign direct investment will be flat or down in 2021. Foreign companies will be cautious until they see a friendly attitude from the Chinese government.”
China may also face higher debt risks amid tightening domestic consumption and increased competitive pressure from abroad.
Zhu Min, a former vice president of the International Monetary Fund, said the Chinese government is back to its old ways of investment-driven growth and that the Chinese economy faces huge structural problems.
Zhu Min told the Boao Forum in Hainan on Monday that China’s strong recovery from the pandemic has been driven mainly by higher investment and exports, while consumption is a drag.
Large-scale infrastructure has driven China’s recovery, and real estate sales have driven growth, but heavy reliance on both has led to long-term imbalances in the Chinese economy.
In its latest rating action commentary, international rating agency Fitch said the rise in Chinese government debt as a share of GDP in 2020 is more than 20%. If China’s financial system vulnerability rises sharply, the rating could face downside risk.
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