China’s consumers vie to check slowdown

New engines taking up the slack with economic expansion matching the 6.8% pace for 4Q of 2017

BEIJING • China’s steady first-quarter (1Q) expansion masked a tug-of-war between struggling old industries from mining to textiles, and booming new-economy sectors including e-commerce and healthcare.

The key question: As China President Xi Jinping strives to curb debt and jousts with US President 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% pace for the last three months of 2017. Among the drivers, online retail sales soared 35.4% in the 1Q from a year earlier while investment in education jumped 26.9%, the Statistics Bureau said. Consumption contributed 77.8% to the quarterly expansion, slightly up from a year earlier.

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

As consumption’s contribution to growth typically surges in the 1Q, yesterday’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% growth in 2018, as Xi’s financial risk campaign gains further traction.

And if trade tensions with the US 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”.

Trade announcements followed the gross domestic product (GDP) report. The Commerce Ministry said temporary anti-dumping deposits will be imposed on US 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 US 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.”

Another driver of activity was investment in environmental protection and cleanup, which surged 34.2% in the 1Q, according to the Statistics Bureau.

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

“March data point to nascent signs of a growth slowdown underway, led by old economy sectors,” said Rob Subbaraman, chief economist for Asia ex-Japan 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.”

If the world’s second-largest economy does ease to a pace of 6.5% this year, it’ll be the slowest pace since 1990. That’s all part of the plan though, as policymakers have been signalling 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.” — Bloomberg