[ad_1]
China’s economic boom in the first quarter primarily reflects how badly the world’s second-largest economy was hit by the Covid-19 pandemic early last year, rather than the strength of its recovery.
While gross domestic product grew by more than 18% year-on-year between January and March, its increase from the last quarter of 2020 was only 0.6%.
China is expected to post an overall figure of around 8% year-on-year when the National Bureau of Statistics releases its second-quarter growth estimate on Thursday. The focus, however, will be on signs of an economic slowdown and whether these are cause for concern for the government to adjust policy.
Here are five things to watch out for following Thursday’s announcement.
Will growth in industrial production and investment in fixed capital slow down?
The Chinese economy was strongly boosted by industrial production, up 24.5% year-on-year in the first quarter, and investment in fixed assets, which increased 25.6% year-on-year in March.
Both are associated with the debt-fueled “low-quality” growth model that Chinese officials, led by Deputy Prime Minister Liu He, want to move away from but tolerated to help the country recover from the pandemic. Over the past few months, they have softened. Industrial production growth rose 15.4% year-on-year in May, while annual increases in capital investment fell below 10% in April and May.
Will China enter a new round of easing?
The People’s Bank of China on Friday lowered the amount of reserves banks must maintain by 50 basis points, to 8.9% on average. This was the first such reduction since March 2020.
Analysts are divided whether the central bank will now step up monetary easing. Wei Yao, economist at Société Générale, thinks so. “This tool is never used when the economy is doing well,” she noted, adding that another reduction in reserves was likely before the end of the year as well as a possible cut in interest rates. interest in 2022.
Others, however, are taking the central bank at its word when it said last week’s reduction in reserves was primarily intended to counter the reduction in liquidity as medium-term lending facilities expire.
“The main purpose of the reduction is to reduce costs for businesses by reducing costs for banks,” said Larry Hu, chief economist for China at Macquarie. “We don’t think [the] the reduction signals a new round of easing or a worse-than-expected economic slowdown ahead. “
Will Liu’s goal of containing financial risks outweigh fears of an economic slowdown?
The reduction in the PBoC’s reserves came just two days after the state council, the Chinese cabinet, urged it to do so. But the central bank had ignored a similar call from the government in June 2020, a sign of the continuing tension between officials worried about financial risks and those more concerned about growth.
Members of Liu’s camp fear that easing monetary policy could spur reckless borrowing, which contributed to a wave of defaults in two of China’s largest industrial provinces last year. China’s largest bad debt manager and some of the country’s biggest real estate developers are also struggling to restructure their debt.
“China is running out of time to deal with its mountain of bad debt and the resulting financial risk,” Diana Choyleva of Enodo Economics said, adding that 2021 would likely be “a distinctly binary year” for the Chinese economy.
But supporting economic growth is still a priority during crises such as the pandemic, as well as before important political events such as the celebration of the Chinese Communist Party’s centenary this month. This tension will continue as the party tries to strike a balance between boosting growth and reducing financial risk ahead of next year’s 20th party convention, in which President Xi Jinping is expected to start an unprecedented third term in office. .
Will restrictions on local government spending be relaxed?
The issuance of bonds and investment by local government finance vehicles, which play a central role in infrastructure investment, will be a sign of who wins the political argument.
Overall infrastructure investment fell 3.6% year-on-year in May, the first annual drop since last year’s Covid outbreak in Wuhan, crippling much of the Chinese economy. Special purpose bond issues totaled just 1.2 billion Rmb ($ 186 billion) in the first five months of this year, compared to 2.3 billion Rmb in the same period. last year.
Will China’s Covid strategy hold back growth?
While China remains on track to fully vaccinate 70% of its population by the end of the year, it shows no sign of abandoning its “zero Covid” approach to the pandemic. This will likely limit inbound and outbound travel to negligible levels until at least until next year’s Olympic Winter Games in Beijing, while also taking extreme measures whenever outbreaks occur. The draconian response to a recent cluster of infections at one of the country’s largest ports has caused enormous disruption for exporters.
It’s a reminder that while China has been successful in containing the pandemic, its impact on certain sectors of the economy will continue to be felt next year, if not longer.
Source link
