Mainland China’s GDP in January-March was 18.3 per cent higher than a year earlier but up just 0.6 per cent on the previous quarter – an annualised increase of less than 3 per cent, or less than half of pre-pandemic levels. The recovery has lost some momentum.

The huge annual jump reflects last year’s low base. Meanwhile, the slower quarter-on-quarter pace is to be expected, but different parts of the economy are growing at different paces.

The industrial sector has actually outperformed pre-pandemic growth once the base effect is stripped out, but services growth is still relatively weak. In particular, the wholesale and retail trade, accommodation and catering, plus leasing and business services remain under pressure.

And while the services production index has largely recovered to pre-pandemic growth, value-added growth shows the services sector is still facing a larger gap in its recovery. This is because the production index mainly reflects larger enterprises’ output; the drag in services value-added stems from continued pressure on small and medium enterprises.

Relatively high unemployment also plays into a slower services recovery. Meanwhile, higher input costs could also explain the relatively smaller value-added growth.

Some drivers for growth last year are likely to slow in the coming quarters, while lagging sectors have begun to pick up. In 2020, export growth, real-estate investment and private investment began to rebound but their momentum will slow because that recovery has already occurred and as the low base effect dissipates. Policies to address concerns of overheating in property will likely dampen investment there this year.

Government-related production and consumption could also be less of a growth driver in 2021, given the less-expansionary fiscal stance.

Meanwhile, a recent pick-up in retail sales and manufacturing investment, plus the continued domestic recovery and stronger export growth, point to a demand-side recovery that is likely to continue.

Inflation rates are rising, but driven largely by imported inflation and the domestic recovery. Producer-price inflation significantly exceeds consumer-price growth because of higher price expectations and rising global commodity prices. Some key driving forces for higher global commodity prices are likely temporary, such as being due to production bottlenecks. However, Beijing’s focus on environmental goals and reducing dependence on fossil fuels, may also have raised expectations for prices of energy-intensive commodities.

The higher producer prices are largely limited to upstream industries because downstream firms have less ability to pass on increased input costs. The increase in producer-good prices is thus greatly outpacing the rise in consumer goods: core consumer-price inflation remains below pre-pandemic levels with the annual rate at or below 0.5 per cent since mid-2020.

However, if the domestic demand recovery adds to more persistent strength in producer-price growth, it could be transmitted into higher core consumer-price inflation, possibly later this year.

Given the unevenness in the recovery and continued risks from the global impact of the pandemic plus the domestic debt burden, policymakers need to continue supporting a sustained recovery.

There will thus be no sharp U-turns. We expect the loan prime rate to stay at 3.85 per cent this year with Beijing continuing to provide targeted support for small firms and manufacturers. And to manage debt risk, the authorities will likely continue to put pressure on property financing and monitor local government’s debt risks.

First published 23 April 2021.

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