As expected, China reported its largest quarterly economic expansion in history Friday.
The world’s second largest economy grew 18.3% YoY in the first quarter, just shy of estimates (figure below).
China was, of course, the first nation to institute a draconian lockdown aimed at curtailing the transmission of COVID-19. The containment effort generally succeeded in stopping the spread, but I’m compelled to include the standard caveat. It’s unlikely that anyone outside of top Party officials will ever know how many Chinese actually died from the virus or complications.
The Q1 2020 lockdown in China forced Beijing to report the first overall economic contraction since at least 1992. To call it anomalous would be to laughably understate the case. Such an outcome was unimaginable as late as December 2019. Or at least to the outside world it was.
It’s against that comp that the Chinese economy’s Q1 2021 performance was measured, so the figure (above) doesn’t really tell you much. China was the only major economy to expand in 2020. Beijing last month set a growth target of “more than 6%” for 2021, well below analysts’ expectations.
Also on Friday, China released activity data for March. Analysts continue to debate the best way to assess the situation. The comp with last year renders the numbers difficult to parse. Retail sales, which lagged industrial production during the initial stages of China’s recovery, rose 34.2% YoY last month. That was ahead of consensus, which was looking for 28%. On a two-year average basis, retail sales rose 6.3% in March.
Industrial production rose 14.1% YoY. Consensus there was 18%. The numbers were similarly distorted last month. The end-March jobless rate was 5.3% compared to 5.5% in February.
Trade data has been upbeat this year. I’ll just repeat (verbatim) the narrative, as I described it earlier this week. External demand should pick up. Much to the chagrin of those inclined to fault China (in one way or another) for the pandemic, the country has benefited from global demand for medical supplies and products tied to the proliferation of work-from-home arrangements. Now, as the global economy gets back on its feet, China could benefit further.
Imports appeared robust in March, which in part reflected rising commodity prices, but could also signal firming domestic demand. The beat on retail sales could further embolden those inclined to take an optimistic view of consumption, although, again, drawing conclusions is difficult, especially in real time.
The PBoC is keen to rein in speculation, especially in the property sector. Now that the recovery is largely complete, there are concerns that a renewed de-leveraging push could lead to tighter and tighter policy.
A directive to banks instructing lenders to maintain credit extension at or around last year’s levels may mean loan growth slows to a 15-year low in 2021. That could be a problem not just because it might choke off the domestic recovery, but also because the global macro cycle is tethered to China’s credit impulse. At the same time, there are concerns that surging factory-gate prices could contribute to a sudden upsurge in inflation in the developed world.
Meanwhile, rising defaults are also cause for concern. Of the more than $15 billion in missed payments during the first three months of the year, a quarter were attributable to the property sector, according to Bloomberg. Perhaps more vexing, nearly three quarters of onshore defaults in 2021 so far are tied to SOEs. The figure for all of 2020 was more than half. In 2019, it was a mere 9%. (I should note that the figure, below, is derived from Fitch data. I haven’t verified the numbers. Bloomberg’s data appear to show a much higher figure for total onshore defaults in 2021 thus far.)
China Huarong’s trials and tribulations were a veritable obsession for some market participants this week, and there was still little in the way of clarity around the situation as of Friday morning.
Keeping yourself apprised of every spinning plate in China’s high stakes routine is challenging. One handy way to conceptualize of it is just to picture the most spectacularly perilous juggling act your mind can possibly conjure. Somehow, Beijing never falls off the tightrope, to mix circus metaphors.
