Chinese GDP: five things to watch

China’s National Bureau of Statistics will release its estimate of first-quarter gross domestic product growth on Friday, with banner figures expected a year after the Covid-19 pandemic put an end to the world’s second-largest economy.

The country has recorded a historic year on year contraction by nearly 7% in the first quarter of 2020, paving the way for a dramatic rebound this year.

The March exports were the most recent example of this “low base” effect, up more than 30% from the same month last year, when China was stranded to contain the coronavirus.

Here are five things to watch out for in Friday’s release.

How big will the rebound in the first quarter be?

Larry Hu, chief China economist at Macquarie, said first-quarter economic output was “on track to [expand] 18 percent ”from year to year.

But that “first-in, first-out” momentum will slow through the remainder of 2021. China’s economy grew 6.5% in the fourth quarter and 2.3% year-round, making it the only major economy to grow in 2020.

Premier Li Keqiang announced a full year growth target “By at least 6 percent” at the annual session of the National People’s Congress, China’s rubber stamp parliament, held last month in Beijing.

Why not aim higher?

Chinese financial officials, led by Liu He, Deputy Prime Minister and the country’s most powerful financial official, is eager to curb some of the stimulus packages that have dampened the economy, but have also undone their success in stabilizing the overall level of China’s debt.

Liu’s team is determined to restore financial discipline. He refused to accept “helicopter money” and other demand-side stimulus triggered by major Western economies such as the United States.

The gravity of their intention was underscored in February, when the People’s Bank of China quietly ordered domestic and foreign lenders to maintain new loan growth flat compared to the same period last year.

Will they succeed?

Issuing diktats to China’s state-controlled banking system is often ineffective, even for powerful officials like Liu.

President Xi Jinping said that “houses are made for living, not for speculating,” and China main banking regulator has named the real estate sector as the economy’s biggest “gray rhino” risk to stability.

But the country real estate boom did not decrease. Real estate-related investment and loan growth increased 38% and 14% year-over-year during the January to February period, respectively.

Steel production also rose 6 percent last year to a record 1.1 billion tonnes. The government’s efforts to bring the sector under control, which exacerbated air pollution levels in northern China this spring, have led to higher prices, which has boosted production.

Will consumption and services rebound?

China’s impressive economic recovery last year was driven by surging industrial production, while retail sales remained relatively weak. The service sector has also been the most affected by the pandemic.

This is the opposite of what Beijing would like to see, as it tries to rebalance the economy from industrial activity fueled by credit towards consumption. But it turns out to be very difficult. China recorded a consumer price deflation in November by minus 0.5 percent for the first time in more than 10 years.

What other constraints does Beijing face as it tries to slow down the recovery?

The Xi administration does not want to apply the brakes too hard before the centenary of the founding of the Chinese Communist Party, which will be celebrated on July 1.

“The party will do ‘whatever it takes’ to prevent a downturn in the economy or a bad fall in the stock market from spoiling the race to [the] celebrations, ”said Diana Choyleva at Enodo Economics. “After that, a new emphasis on reducing China’s debt burden will lead to tighter policies and liquidity conditions.”

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