Natixis:  The unpleasant truth behind China’s GDP figures

  • The Chinese economy started 2021 with a strong momentum as the GDP grew 18.3% YoY in Q1. Such record-high growth rate, though, was largely within the market’s expectation due to the very favorable base effect. A more relevant question is what growth would really be when we exclude the base effect from last year.


  • One way to address the issue is to look at the growth rate from a QoQ perspective. After seasonal adjustments, China’s QoQ growth rate was 0.6% in Q1 2021 versus Q4 2020. This is lower than the average seasonally adjusted QoQ growth rates (1.9%) for the pre-pandemic period (2017-2019). One reason for this softer growth is the small-scale Covid-19 outbreak in the run-up to Chinese New Year but hard to argue it can account for all. In fact, it also points to uncertain path of recovery. Having said that, business sentiment does not seem to be worried about the high level of uncertainty as PMI data for both manufacturing and non-manufacturing activities has remained above 50 over the past three months with a further improvement in March.


  • On domestic demand, the year-to-date retail sales shows a skyrocketing growth rate of 33.9% YoY for the first quarter. A deeper dig into the month-over-month changes (which excludes the base effect from last year), however, shows that retail sales decreased first in January because of the local Covid-19 outbreak and the associated tightening measures. In fact, it only started to recover again later as the government successively contained the spread of the virus with the month-over-month growth rates for retail sales moving back to 1.45% and 1.75% in February and March, respectively. Although the overall trend is clearly moving upward, China’s consumption is not yet fully back to normal. The household’s average propensity to consume was only 61.4% in Q1 2021, which was significantly lower than the pre-pandemic level, i.e. 65.2% in Q1 2019.


  • Compared to retail sales, fixed asset investment growth rates exhibited a more stable month-over-month growth pattern (from 1.15% in January to 1.51% in March) over the past three months, ending Q1 with 25.6% YoY growth rate. In particular, the year-to-date manufacturing investment grew 29.8% by the end of the first quarter against the backdrop of a collapse in the first quarter of last year. Such fast recovery is consistent with the rising producer price over the past three months which surged to 4.4% in March. While the property investment YTD (25.6% YoY) was slightly lower than manufacturing by the end of the first quarter, it is clearly a strong pillar as it did not benefit from such a huge base effect as compared to manufacturing investment.


  • As for external demand, China’s exports grew by nearly 50% YoY year-to-date until the end of Q1. Imports, instead, only grew 28%. This has led China’s year-to-date trade surplus to increase to $116 billion by the end of March, which is significantly higher than that of 2016-2019. In particular, China’s bilateral trade surplus with the US and the EU-27 increased sharply while the trade deficit vis-à-vis Japan and Australia widened.


  • Against the backdrop of economic recovery, the PBoC was accommodative during the first quarter. The central bank’s liquidity injection to the financial system was kept at a similar pace when compared to Q1 2020. As such, the 3-month SHIBOR came down from 2.75% to 2.64% during Q1. On the longer end of the curve, interest rates have remained quite stable. Because of the surge of US long-term yield during the first quarter, the narrowing yield differential has caused the CNY to depreciate above 6.5 against the US dollar. Having said that, the PBoC still exercised some caution on credit expansion and the shadow banking component of the total social financing continued shrinking.


  • Notwithstanding the cautious monetary policy and the government’s continued scrutiny on financing to the property market, China’s housing price accelerated across the board from tier-1 to tier-3 cities. In contrast, the equity market performance was sluggish during Q1 as the SHCOMP index decreased by about 100 points.


  • On the back of the current economic momentum, as well as the fiscal support announced earlier during the Two Sessions, we expect China’s economic growth to sustain in the following months, even though the growth number will be less appealing as the base effect fades away. That said, a full normalization of the economy, especially for household consumption to fully catch up with the income growth, will depend on the pace of vaccination, which is still low in China given the large population. The external environment will also be crucial. Beyond geopolitical risk, and in particular the increasingly tense US-China relations, exports may be hit as global production capacity continues to resume and Chinese producers face more competition from other exporters.


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Published By: Atilla Yeşilada

GlobalSource Partners’ Turkey Country Analyst Atilla Yesilada is the country’s leading political analyst and commentator. He is known throughout the finance and political science world for his thorough and outspoken coverage of Turkey’s political and financial developments. In addition to his extensive writing schedule, he is often called upon to provide his political expertise on major radio and television channels. Based in Istanbul, Atilla is co-founder of the information platform Istanbul Analytics and is one of GlobalSource’s local partners in Turkey. In addition to his consulting work and speaking engagements throughout the US, Europe and the Middle East, he writes regular columns for Turkey’s leading financial websites VATAN and and has contributed to the financial daily Referans and the liberal daily Radikal.