China Consumers Vie to Check Slowdown as Trade Spat Lingers

(Bloomberg) -- China’s steady first-quarter expansion masked a tug-of-war between struggling old industries from mining to textiles, and booming new-economy sectors including e-commerce and health care.

The key question: As President Xi Jinping strives to curb debt and jousts with Donald Trump over trade, how much of the potential drag can the new growth drivers offset?

For now, the new engines are taking up the slack with the economic expansion matching the 6.8 percent pace for the last three months of 2017. Among the drivers, online retail sales soared 35.4 percent in the first quarter from a year earlier while investment in education jumped 26.9 percent, the statistics bureau said. Consumption contributed 77.8 percent to the quarterly expansion, slightly up from a year earlier.

Old engines are laboring. Industrial production missed estimates for March amid anemic performance in segments including mining, metal products and textiles.

As consumption’s contribution to growth typically surges in the first three months, Tuesday’s data isn’t likely to be indicative of the outlook for the rest of the year. Indeed, economists forecast a slowdown from 2017 to 6.5 percent growth in 2018, as Xi’s financial risk campaign gains further traction. And if trade tensions with the U.S. escalate, it may be asking too much of China’s new economy to take up all the slack.

“The good news is that consumers are taking it all in stride, offering a welcome buffer against potential tariffs externally and policy curbs on construction locally,” said Frederic Neumann, co-head of Asian economics research at HSBC Holdings Plc in Hong Kong. The not-so-good news is that “China will likely cool further in the coming months as Beijing’s policy restrictions are starting to bite. Construction in particular is feeling the brunt,” he said.

China Consumers Vie to Check Slowdown as Trade Spat Lingers

Trade announcements followed the GDP report. The Commerce Ministry said temporary anti-dumping deposits will be imposed on U.S. sorghum imports, adding to trade tensions, while the National Development and Reform Commission said foreign ownership limits for auto ventures will be removed in coming years, a boost to global companies seeking better market access. The Foreign Ministry said Beijing is ready to start trade countermeasures.

“Economic tension between the U.S. and China is rising,” Louis Kuijs, chief Asia economist at Oxford Economics in Hong Kong and a former International Monetary Fund researcher, wrote in a note. “We worry about the long-term implications but view a trade war with substantial short-term growth impact as unlikely. Nonetheless, we continue to expect China’s GDP growth to slow in the rest of the year because of tighter monetary financial policies.”

Technology, Finance

A supplemental report on Wednesday showed the technology sector again gave a big lift to the economic expansion and helped boost the services sector, offsetting a muted performance in financial services. Technology output jumped 29.2 percent from a year earlier, nearly in line with the 33.8 percent pace in the prior quarter. Financial industry growth slowed to 2.9 percent for the second-lowest reading in more than a decade amid a push to curb debt risk.

The supplemental data showed the services sector led the first-quarter expansion with 7.5 percent growth. China’s other two main categories for its economy lagged, with growth from manufacturing and construction accelerating to 6.3 percent and agriculture slowing to 3.2 percent.

China Consumers Vie to Check Slowdown as Trade Spat Lingers
What our economists say
The steady expansion in GDP shows the economy staving off threats from deleveraging and protectionism, according to a note from Bloomberg economists Tom Orlik and Fielding Chen. “Even so, a lower reading for nominal growth is a warning sign that the industrial reflation cycle that drove profits higher and made debt repayment more manageable in 2017 is turning down.”

Industrial output by the mining sector decreased 1.1 percent in March, compared with a 0.9 percent drop in December, while output for power supply increased 5.8 percent, less than the 8.2 percent increase in December.

“March data point to nascent signs of a growth slowdown underway, led by old economy sectors,” said Rob Subbaraman, head of emerging markets economics at Nomura Holdings Inc. in Singapore. “We don’t expect growth in new economy sectors to fully offset the slowdown in the old, heavily-indebted sectors of the economy in the quarters ahead. This is a necessary adjustment to improve the quality of China’s growth.”

China Consumers Vie to Check Slowdown as Trade Spat Lingers

If the world’s second largest economy does ease to a pace of 6.5 percent this year, it’ll be the slowest pace since 1990. That’s all part of the plan though, as policy makers have been signaling that they’re prepared to pay a price in headline performance in order to clean up the parts of the economy that are clearly unsustainable.

“This shows us that China can attain the growth target easily in 2018 even with slightly slower expansion in the second half,” said Raymond Yeung, chief greater China economist for Australia & New Zealand Banking Group Ltd. in Hong Kong. “It provides a good window to address some structural issues, especially deleveraging.”

©2018 Bloomberg L.P.