China’s steady first-quarter expansion masked a tug-of-war between struggling old industries from mining to textiles, and booming new-economy sectors, including e-commerce and health care.
The key question: As President Xi Jinping strives to curb debt and jousts with Donald J. Trump over trade, how much of the potential drag can the new growth drivers offset?
For now, the new engines are taking up the slack with the economic expansion matching the 6.8-percent pace for the last three months of 2017.
Among the drivers, online retail sales soared 35.4 percent in the first quarter from a year earlier, while investment in education jumped 26.9 percent, the statistics bureau said. Consumption contributed 77.8 percent to the quarterly expansion, slightly up from a year earlier.
Old engines are laboring. Industrial production missed estimates for March amid anemic performance in segments including mining, metal products and textiles.
As consumption’s contribution to growth typically surges in the first three months, Tuesday’s data isn’t likely to be indicative of the outlook for the rest of the year.
Indeed, economists forecast a slowdown from 2017 to 6.5-percent growth in 2018, as Xi’s financial-risk campaign gains further traction. And if trade tensions with the US escalate, it may be asking too much of China’s new economy to take up all the slack.
“The good news is that consumers are taking it all in stride, offering a welcome buffer against potential tariffs externally, and policy curbs on construction locally,” said Frederic Neumann, cohead of Asian economics research at HSBC Holdings Plc. in Hong Kong.
The not-so-good news is that “China will likely cool further in the coming months as Beijing’s policy restrictions are starting to bite. Construction in particular is feeling the brunt,” he said.
Another driver of activity was investment in environmental protection and cleanup, which surged 34.2 percent in the first quarter, according to the statistics bureau.
What our economists say: “The steady expansion in GDP shows the economy staving off threats from deleveraging and protectionism,” according to a note from Bloomberg economists Tom Orlik and Fielding Chen.
“Even so, a lower reading for nominal growth is a warning sign that the industrial reflation cycle that drove profits higher and made debt repayment more manageable in 2017 is turning down.”
Industrial output by the mining sector decreased 1.1 percent in March, compared with a 0.9-percent drop last December, while output for power supply increased 5.8 percent, less than the 8.2 percent increase last December.
“March data point to nascent signs of a growth slowdown underway, led by old economy sectors,” said Rob Subbaraman, chief economist for Asia ex-Japan at Nomura Holdings Inc. in Singapore. “We don’t expect growth in new economy sectors to fully offset the slowdown in the old, heavily-indebted sectors of the economy in the quarters ahead. This is a necessary adjustment to improve the quality of China’s growth.”
If the world’s second-largest economy does ease to a pace of 6.5 percent this year, it’ll be the slowest pace since 1990.
That’s all part of the plan though, as policy-makers have been signaling that they’re prepared to pay a price in headline performance in order to clean up the parts of the economy that are clearly unsustainable.
“This shows us that China can attain the growth target easily in 2018 even with slightly slower expansion in the second half,” said Raymond Yeung, chief greater China economist for Australia & New Zealand Banking Group Ltd. in Hong Kong. “It provides a good window to address some structural issues, especially deleveraging.”