China GDP: economy grew, but 'more pain will come' as coronavirus, lockdown pressures weigh on outlook

China's first quarter growth beat expectations, but weaknesses highlighted by the ongoing coronavirus wave hang over the economic outlook, with questions being asked if Beijing will take further action to guard against multiple headwinds.

Gross domestic product (GDP) growth of 4.8 per cent in the first three months of 2022 compared with a year earlier, which was confirmed on Monday, was higher than the 4 per cent expansion registered in the previous quarter and is in stark contrast to the start of 2020, when China's economy shrank by 6.8 per cent.

But in the first three months of this year, consumption, exports and investment are all losing steam and businesses and residents in Shanghai, which has been under a de facto lockdown since the end of March, are demanding action.

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Many other Chinese cities are also feeling the strain of China's "dynamic zero-Covid strategy", and analysts have pointed to a convergence of downward pressure, which also includes a rising jobless rate, growing capital outflows and the emergence of higher producer and consumer prices.

"GDP in the first quarter does not fully reflect lockdown impacts," said Iris Pang, chief Greater China economist at ING Bank. "More pain will come in the second quarter."

Retail sales fell by 3.5 per cent in March, year on year, compared to 6.7 per cent growth in combined figures for January and February.

Revenues for the contact-intensive catering sector dropped by 16.4 per cent last month, while car sales plunged by 7.5 per cent, garments sales by 12.7 per cent and jewellery sales by 17.9 per cent.

Fixed-asset investment, a frequently used tool to drive up growth, grew by 9.3 per cent in the first three months of the year, slowing from 12.2 per cent growth in January and February.

Despite the government's easing, property investment growth fell by 2.4 per cent year on year in March, according to Post calculations using data from the National Bureau of Statistics (NBS).

Industrial production grew by 5 per cent in March from a year earlier, down from 7.5 per cent growth in combined figures for January and February, although the slowdown last month can be attributed to price increases.

Production of industrial products fell last month, including a 6.4 per cent drop in crude steel output and a 4.9 per cent decline in car production.

It had already been confirmed that imports in March also fell by 0.1 per cent from a year earlier amid weaker domestic demand, shipping disruptions and overseas coronavirus controls.

This fuelled speculation that exports, which contributed a fifth of national growth last year, could also be negatively affected in the coming months.

"Locking down large cities like Shanghai is highly costly. Such costs will become more visible in the coming months. This delicate balancing act will become more difficult," said Zhang Zhiwei, chief economist at Pinpoint Asset Management.

Beijing has set an economic growth target of "around 5.5 per cent" for this year, but with coronavirus disruptions likely to last for weeks and set to weigh on activity in April and May, a stronger macro policy response is expected in the second quarter.

"The effectiveness of policy stimulus will depend on whether mobility will still be restricted on a broad scale, so risks to the outlook remain skewed to the downside," said Tommy Wu, lead China economist at Oxford Economics.

China's commercial hub of Shanghai has reported more than 372,000 infections since the start of March, including 22,248 on Sunday.

Shanghai, which represents 3.8 per cent of the national GDP and is home to the world's busiest port, also reported its first fatalities from the city's current wave of Covid-19.

The outbreak has also spread to more than 70 cities nationwide, endangering some of Beijing's most cherished policy targets.

China created 2.85 million new urban jobs in the first quarter, but the surveyed national jobless rate hit a 22-month high of 5.8 per cent in March, surpassing the government annual control target of 5.5 per cent.

The unemployment rate in 31 large cities rose to 6 per cent, the highest level since it was first published in 2018, while the figure for those aged 16 to 24 rose to 16 per cent in March, up from 15.3 per cent in combined figures for January and February.

China is also watching capital outflows triggered by US Federal Reserve interest rate increases and rising commodity prices driven up by the Russia-Ukraine war.

"Geopolitical conflicts have brought sanctions and anti-sanctions, which will affect the effectiveness of global supply chains, raise the transport and trading cost of commodities and increase the upwards price pressure," said NBS spokesman Fu Linghui.

The World Bank has already cut its growth forecasts for China's economy to 5 per cent this year, down from a previous estimate of 5.4 per cent.

But ING's Pang warned that support from fiscal and monetary policy has not been enough to fully offset the damage caused by the lockdowns, which may force the bank to downgrade its current growth estimate of 4.6 per cent.

"We are holding off taking this action for now and waiting to see if the central government will provide more fiscal support for the economy," she said.

The 25-member Politburo headed by President Xi Jinping often convenes an economic analysis meeting after the quarterly data is released, providing an opportunity for policy improvements.

"Policies to respond to the slowdown have been made clear, and the measures are being pushed forward at full speed. More policy combinations are also being studied," said vice-finance minister Liao Min at the Wudaokou Global Financial Forum over the weekend.

Premier Li Keqiang has also already convened several meetings with experts, entrepreneurs and local cadres in April, flagging worse-than-expected economic headwinds and calling for a "sense of urgency".

"There is nothing in the data arguing against further policy easing. But the problem, as we have repeatedly stressed, is the lockdowns - still in place and still spreading", said Societe Generale economists Yao Wei and Michelle Lam, who added that the economy is "in distress".

"We expect the implementation of the zero-tolerance policy to be adjusted in the coming weeks to allow Shanghai's industrial sector to resume production, so as to save the supply chains of China's high-end manufacturing from permanent scarring.

"But the demand engine may have to continue to run on infrastructure investments and the [fading] export momentum for some time".

On Friday, the People's Bank of China announced a much-anticipated cut of its reserve requirement ratio for commercial banks, although the 25-basis point cut was smaller than expected and failed to lift market sentiments.

"Looking ahead, we expect policy rhetoric to turn more supportive in the Politburo meeting at the end of this month," said Larry Hu, chief China economist at Macquarie Capital.

"But most likely they wait till the July Politburo meeting to escalate stimulus, if necessary."

After the data release, China's central bank unveiled fresh support to counter headwinds from Covid-19.

The support included plans to roll over the 400 billion yuan (US$62.8 billion) relending quota for small businesses and more loans for self-employed workers.

It encouraged local governments to frontload their infrastructure investment, and also pledged a greater share of new bank loans for private businesses.

This article originally appeared on the South China Morning Post (SCMP).

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