China: the economy surprises for good

China recorded growth Of 5.3% during the first quarter, a surprising performance to outside observers, which even exceeded the expectations of major investment banks. Some are starting to revise upwards their forecasts, which clearly underlines that, while continuing its ongoing transformations, the Chinese economy continues to grow.

Original article published on Conflits.

To avoid being influenced by the often negative tone of certain Western media, and in order to have a precise vision of the economic reality in China, it seems useful to us to review certain figures and facts in an objective and coherent manner. occasion of the publication of the first quarter results.

First quarter results

On April 16, China’s National Bureau of Statistics released its growth data[1], surprising external observers with GDP up 5.3% for the first quarter. This performance exceeds the pessimistic expectations of the outside world, even surpassing the forecasts of major investment banks such as Goldman Sachs and Morgan Stanley, as well as those of analysts polled by Reuters and Bloomberg agencies.

As a reminder, the IMF had forecast growth of 4.6%, while China had announced a target of 5% in March. We will have to wait until the end of the year to confirm this recovery, both expected for a confident China and surprising for skeptical observers.

Some financial institutions quickly revised upwards their annual growth forecasts for the Chinese economy. Economists at ANZ now forecast growth of 4.9% for this year, compared to their previous forecast of 4.2%, while those at DBS Bank increased their outlook for 2024 from 4.5% to 5%. Societe Generale also raised its growth forecast for 2024 to 5% from 4.7%, while Deutsche Bank now expects growth of 5.2%, half a percentage point higher than their previous forecast.[2]

Those behind the numbers

Is the Chinese economy out of the woods? A more detailed and nuanced reading of all the elements behind these figures helps us understand the full complexity of the situation regarding the engines and brakes.

China is aiming for growth of around 5% for the year, a goal considered ambitious by many economists. With growth at 5.3% in the first quarter, China’s economy is off to a good start, but the foundations for stable and healthy economic growth are not yet completely solid. [3]

To support its growth, China has invested heavily in its manufacturing sector, including building new factories that have boosted global sales of solar panels, electric cars, batteries and other products. Some experts see the expansion as a sort of “sugar spike” fueled by massive bank lending, up 9.9% from the previous year. This is a situation to monitor carefully.

In the first quarter, China’s economy grew by 1.6% compared to the previous quarter, which on an annual basis equates to growth of around 6.6%. However, retail sales growth was modest, with an increase of 4.7% from a year earlier, and weaker in March. China must continue to encourage consumption to reduce youth unemployment and help indebted businesses and households.

Robust exports at the start of the year also contributed to growth, although falling prices limited real gains. Domestic tourism and smartphone sales saw an uptick during the Lunar New Year (except for Apple), surpassing pre-pandemic levels. However, widespread price declines remain a challenge, particularly for exports and wholesale trade.

There has been a slowdown in the construction of new housing and a fall in apartment prices. At the same time, banks were encouraged by the government to give more loans to finish apartments nearing completion, given that in 2023, completions reached 7.8 billion square feet (square feet) in 2023, eclipsing construction starts for the first time.[4]

Of course, high US interest rates have a negative impact.

It is important to consider all of these elements when assessing the overall situation. The road ahead is still long and difficult. Efforts are essential to promote the transformations already initiated.[5]

Is there a problem of overcapacity (overcapacity) ?

In high-level meetings earlier this month with Chinese officials, Treasury Secretary Janet L. Yellen said there is a problem of overcapacity in Chinese industry that would flood markets with exports, disrupt supply chains supply, and would threaten industries and jobs.

Ms. Yellen, an economic expert, should understand that the expansion of a product’s market share is closely linked to its comparative advantages, such as production costs, quality and marketing. In a competitive market, there is no problem of overcapacity, because quality products with lower cost naturally sell better than others. Furthermore, production capacity is a decision freely taken by the actors involved.

In addition, some affected products, such as electric cars, are still in the initial stage of development in the global automobile market. So where does this notion of overcapacity come from? Otherwise, how should we characterize the situation of ASML which completely dominates the market for lithography machines called EVUs?

The truth is that Chinese exports worry many foreign countries and companies. When their products have full comparative advantages, they are 100% for free competition to China; if this is not the case, they fear that an influx of Chinese shipments to distant markets could harm their manufacturing industries. It seems that the story ofOvercapacity or simply a new pretext invented to justify protectionism.

Another case deserves to be raised. For several years, we have observed sanctions affecting chipsets, particularly high-end machines and products. American and European companies are banned from selling them to China. The day China is able to produce these chipsets in large quantities, with the required quality and at lower cost, perhaps we will hear the same story of Chinese overcapacity?

Rather than dreaming of imposing a sort of Japanese-style VER (Voluntary Export Restraint – voluntary limitation of exports),[6] it would be wiser to be frank and fully engage in dialogue while fully respecting WTO rules.

The new model / the new productivity

Many talk about the new productivity or the new economic model in China. What is it about ?

The objective is to increase production by taking advantage of technological and scientific progress, particularly in cutting-edge sectors, to boost the economy and create more added value. [7] The trio of electric vehicles, batteries and solar panels is often cited as an example.

Conclusion

Since 2019, slowing growth in China has led many observers to argue that the country has already reached its peak as an economic power. However, in his recent article entitled China is still developing (China Is Still Rising)published in the journal Foreign Affairsrenowned American economist Nicholas Lardy believes that this view reflects an insufficient understanding of China’s resilience.

It is undeniable that China faces enormous challenges, such as the housing bubble, US sanctions on advanced technology exports including high-end semiconductors, an aging population, growing youth unemployment, over-indebtedness of local governments and the need to stimulate domestic consumption. At the same time, it is worth remembering that China has overcome much greater challenges in the past when it began its reforms and opening-up.

Nicholas Lardy is confident that China would continue to grow at twice the rate of the United States in the future. [8] He predicted that China would contribute a third of global economic growth, while expanding its influence, mainly in Asia. The solid performance of the first quarter confirms this trend.

[1] See National Bureau of Statistics of China. GDP: 29.63 trillion RMB ($4.1 trillion); +5.3% over one year. Retail sales: 12 trillion RMB ($1.66 trillion); +4.7%. Industrial added value: +4.5%. Added value of services: +5%

[2] Joe Cash and Kevin Yao, China’s economy grew faster than expected in the March quarterReuters, April 16, 2024

[3] China’s Economy, Propelled by Its Factories, Grew More Than ExpectedKeith Bradsher, Alexandra Stevenson, April 17, 2024.

[4] Nicholas R. Lardy, China Is Still Rising, Don’t Underestimate the World’s Second-Biggest EconomyForeign Affairs, April 2, 2024

[5] Alex Wang, The Chinese economy: transitory pains or the beginning of collapseReview ConflictsFebruary 14, 2024.

[6] VERs appeared in the 1930s and gained popularity in the 1980s, when Japan used one to limit automobile exports to the United States. In 1994, members of the World Trade Organization (WTO) agreed not to implement new VERs and to phase out existing ones (Cf. Marshall Hargrave, September 20, 2023)

[7] See 新质生产力的内涵特征和发展重点习近平经济思想研究中心, 2024/03/01

[8] Nicholas R. Lardy, China Is Still Rising, Don’t Underestimate the World’s Second-Biggest EconomyForeign Affairs, April 2, 2024