Caixin
May 17, 2021 07:20 PM
ECONOMY

China’s Recovery Remains Unbalanced as Consumer Spending Lags

The data underline that while China remains a global growth driver and source of demand for commodities, the economy’s expansion may have already reached its strongest point. Photo: VCG
The data underline that while China remains a global growth driver and source of demand for commodities, the economy’s expansion may have already reached its strongest point. Photo: VCG

(Bloomberg) — China’s recovery remained unbalanced in April, with industrial output and investment buoyed by strong exports and a hot property market, while retail sales missed forecasts.

Industrial output rose 9.8% in April from a year earlier versus the median estimate for a 10% increase. Retail sales expanded 17.7% in the period, far slower than a projected 25% rise. Fixed-asset investment grew 19.9% in the first four months of the year, in line with forecasts. The unemployment rate was lower at 5.1%.

The data underline that while China remains a global growth driver and source of demand for commodities, the economy’s expansion may have already reached its strongest point as policymakers now seek to scale back stimulus and consumers remain cautious about spending.

“Economic growth likely peaked in the first quarter” on a quarter-on-quarter basis, said Zhiwei Zhang, chief economist of Pinpoint Asset Management. “We expect growth to gradually slow in the coming months.” An increase in new Covid cases in China will likely caution policymakers, with monetary policy tightening probably on hold for now, he said.

The data was heavily impacted by base effects from April 2020 when China’s industrial economy reopened after the coronavirus was brought under control. On a two-year average basis, which corrects for that distortion, industrial production growth was constant from the first quarter at 6.8%, while fixed-asset investment accelerated slightly to 3.9% from 2.9%.

However, retail sales growth softened to 4.3% in April on an average two-year basis from 6.3% in March, with the consumption of goods and catering services both turning weaker, denting expectations that consumer demand was beginning to replace investment as a driver of growth.

Households in China have yet to “resume their usual swagger” due to weak income growth, said Frederic Neumann, head of Asian economics at HSBC Holdings Plc. “If households fail to step up their spending in the coming months, the authorities may be forced to loosen the reins on liquidity and investment spending to prevent a sharper deceleration in growth,” he added.

While China’s economy has stabilized at a firmer footing in April, it’s still challenged by the pandemic and an uneven recovery globally as well as a fragile basis for recovery at home, the National Bureau of Statistics said in a statement. A separate report from the NBS suggests the property market remains strong, with home prices rising at the fastest pace in eight months in April.

The nation’s top leaders recently described the recovery as “unbalanced and unstable,” pledging further efforts to drive a rebound in domestic demand. Sheng Laiyun, a vice head of the National Bureau of Statistics, said earlier this month there’s still a gap between actual and potential growth, suggesting the recovery has still some way to go.

China’s stock benchmark CSI 300 Index extended gains to as much as 1.8%, with consumer discretionary and information technology sub-gauges leading the rally.

Industrial production remained robust on the back of a recovery in global demand, with fiscal stimulus and faster vaccine rollouts in many places helping to keep export growth strong. Rising raw material prices was likely a constraint in some areas, as is the push to cut output in sectors like steel and coal to lower pollution.

Authorities have pledged a gradual scaling back of the monetary and fiscal stimulus pumped into the economy last year, with no sharp turn in policy. Recent data shows a notable slowdown in credit in April, suggesting the exit might be materializing at a faster-than-expected pace. The central bank injected medium-term cash into the financial system Monday to match the amount falling due, a move largely expected by analysts.

In March, the People’s Bank of China told banks to curtail loan growth in the coming months and keep it at roughly the same level as last year. The pace of local governments’ debt sales to finance infrastructure projects also slowed sharply in January to April compared to the same period in previous years, according to Bloomberg calculations.

Contact editor Michael Bellart (michaelbellart@caixin.com)

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