The Strategist

Chinese economy gets a head start in Q1

04/22/2019 - 12:49

Unexpectedly, the second economy of the planet has surpassed economists' forecasts and added 6.4% in the first quarter, mainly due to a sharp increase in industrial production in March.

Mstyslav Chernov
Mstyslav Chernov
In recent months, the Chinese economy has been slowing down. However, measures of the Chinese authorities to stimulate the economy have already brought the first results. The State Council (government) of China has cut a number of taxes to help businesses, accelerated implementation of construction projects, lowered required level of bank reserves. At the same time, the authorities tried not to increase the already astronomical debt while helping the economy.

Thanks to the measures taken by the government of the PRC, some normalization in trade relations with America and, mainly, to industrial production, China's GDP grew in the first quarter of this year compared with the first quarter of 2018 by 6.4%. The main driver of growth was industrial production. In March, it rose sharply by 8.5% over the same period a year earlier. Retail sales increased by 8.7%, and investments - by 6.3%. Unemployment remains above 5% for the third month in a row. The first half year growth in car production in March attracts particular attention. Production of aluminum and steel have also reached record values .

State support has somehow stopped the slowdown in the development of the Chinese economy. At that, the encouraging statistics will inevitably lead to heated debates about the need for further stimulation of the economy and whether the Central Bank and the Ministry of Finance should gradually begin to curtail the economic support program.

Investments for state-owned enterprises increased up to 6.7% but decreased up to 6.4% for private companies. Once again, this underlines the role of the state in supporting economic growth. By the way, economists predict that the PRC economy will grow by 6.2% based on the results of the whole of 2019. In 2018, the growth was 6.6%.

The exchanges’ reaction to the statistics was predictable. Immediately after appearance of data for the first quarter, the Shanghai Composite index rose, but then returned to its original level. The rates on ten-year bonds reacted in the same way.

Data on the Chinese economy for the first quarter coincided with publication of data on sea freight transport. The numbers also show that global trade has responded positively to some easing of tensions in trade relations between the United States and the People's Republic of China and the increased possibility of concluding an agreement.

Western countries are not particularly happy with the optimistic figures from China since there are serious doubts about accuracy of Chinese statistics. In any case, there is every reason to say that the Chinese economy finished the first quarter on the rise.

And yet, not all economists share the optimism that published statistics could inspire. Skeptics cite a number of factors that cast doubt on sustainability of the recovery of the Chinese economy. There are reasons to doubt it^ a sharp slowdown in the level of producers' investment in fixed assets; the lowest in 27 years (since 1992) growth in the provision of services; the acceleration of state investment, which in the second half of the year is likely to decrease.