By Ulf Bergman
Hot on the heels of Chinese Premier Li Keqiang’s speech, announcing that the country was targeting a fairly modest growth in excess of six per cent for the year, the latest economic data released on Monday suggest that large parts of the economy remain in rude health. Retail sales and industrial production grew by around 34 and 35 per cent respectively during the first two months of the year, beating the economists’ expectations by a considerable margin. While the year-on-year growth numbers were distorted by the weak comparison base from a coronavirus-hit 2020, the fact that they were better than expected signals that the economy has continued to gain momentum in the first two months of 2021.
However, unlike the data for industrial production and retail sales, investments volumes in fixed assets, such as infrastructure, property, machinery and equipment, failed to impress. It grew by 35 per cent in January and February compared to a year earlier and was well below the consensus projection of around 41 per cent. The unemployment data also showed unexpected weakness. Furthermore, seasonally adjusted month-on-month data showed that retail sales growth fell in January and February, likely due to both the imposed travel restrictions and the ongoing weakness in the labour market.
The mixed messages from the latest data release further cement the perception established last year of a strong, yet uneven, economic recovery in China. The continued strength of the export industry, as illustrated by the large number of container vessels at anchor off the Californian coast due to congestion in the ports, is driving the manufacturing output to new heights. At the same time, the weaker-than-expected investment data indicate that manufacturers are still cautious about the continued strength of the export-driven growth. The rollout of vaccines across the world could potentially be the deciding factor, as it is widely expected to lead to a shift in consumption from goods to services. The unbalanced picture painted by the data also led the National Bureau of Statistics to highlight their view that the economic recovery is far from being on solid footing, with many risks remaining.
In isolation, the strong manufacturing data could have been the trigger for the Chinese leadership to rein in on its fiscal stimulus programmes. The Chinese Premier stressed in his speech the importance of the stability of future economic growth and the strength of the industrial production so far this year could indicate that the economy would over-shoot this year’s target. Hence, there would be a strong argument for fiscal restraint for the rest of the year to avoid the economy overheating. The relative weakness in the domestic economy would on the other hand argue against such a move, as it would soften domestic demand.
The uneven nature of the continued recover is likely to be the primary challenge for the Chinese government in the coming months. The stated ambition to reduce the country’s dependence on the global economy will mean that domestic demand will need to be supported, with fiscal stimulus likely to remain in place and only gradually rolled back. While manufacturing for the export markets can be expected to soften to some extent as the world emerges from the grip of the pandemic, the continued need to support the domestic demand is likely to continue to feed the nation’s appetite for imported industrial commodities.