After the solid first quarter performance, the central government may be in the unique position to achieve its growth target – even while tightening.
In the first quarter, China’s economy grew 6.9 percent; slightly faster than expected and led by strong expansion at factories. What the first quarter data reflects is solid growth in several fronts.
Retail sales soared to 10.9 percent on year-to-year basis, which reflects steady progression in the ongoing rebalancing of the Chinese economy toward consumption. Clearly, it was driven by recent gains in wage and credit growth, despite declining subsidies on car demand.
At the same time, industrial production climbed to 7.6 percent on an annual basis, which was supported by government infrastructure investment, including state-owned enterprises (SOE) and property markets. Overall growth increased to 6.9 percent, which was fueled by trade and financing.
Such data herald strong beginning of the year for China, but also a positive contribution to regional growth and, due to the mainland’s role as the second-largest economy in the world, to global growth prospects.
The question is, can this growth performance be sustained in the coming months?
Conditions for sustained growth
In the first quarter, growth was fueled by heavy use of steel in the construction sector, while investment in electronics factories rose as demand strengthened in foreign markets. The former suggests slow progress in efforts to reign in excess capacity in mining output, including steel. That is likely to be noted in friction about steel overcapacity in the forthcoming G20 Summit in Hamburg, Germany.
Domestically, efforts to resolve the steel crisis are likely to strengthen with political consolidation after the 19th National Congress of the Communist Party in the fall.
In turn, the recovery of the foreign markets reflects more positive international prospects. According to the International Monetary Fund (IMF), the world economy is gaining momentum. Yet, such prospects could be undermined by a broad array of forces, including renewed “America First” protectionism, post-elections turmoil in Europe, geopolitical friction, refugee crises, and broad-scale terrorism.
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