China reaction: momentum accelerated boosted by investment

Much-needed solid GDP growth

China’s economy expanded by 5.3% yoy in Q1 2024, beating the market expectation by a large margin (BBG: 4.4%). The momentum in the economy accelerated from Q4 2023, which grew by 5.2%. In quarterly terms it rose by 1.6%. By industry, the secondary industry saw the fastest growth in value added in Q1, growing by 6.0% yoy, up from 5.5% in Q4 2023. While value added from the tertiary sector slowed to 5.0% in Q1 from 5.3% in Q4 last year.

The better-than-expected momentum in China’s economy is likely to change the market’s view which has been gloomy for several months. It also puts the economy in a better position to achieve the government growth target for the year of 5%. By value added, the secondary industry contributed the most, likely reflecting the higher investment and output from the manufacturing sector. However, the deceleration in the output from the tertiary sector highlighted ongoing weaker consumption in the economy.

Investment in the driver’s seat

Fixed asset investment (FAI) grew by 4.5% yoy in Q1, an increase of 4.8% in March, up from 4.2% in February. Investment in the manufacturing sector remained strong and grew by 9.9% in the first three months, equivalent to a rise of 10.3% in March, up from 9.4% in February. Investment in auto manufacturing was relatively modest at 7.4% yoy in the first quarter of the year. Infrastructure continued to be the hot destination for investment. In Q1, it grew by 9.9% yoy, implying an increase of 6.6% in March. By source of investment, public investment was up by 7.8% yoy in Q1 – echoing the strong boost to infrastructure - while private investment remained sluggish, up a mere 0.5% yoy. Although FAI from foreign funded enterprises improved, it was still 10.4% below the level in the first quarter of last year, improved from a decline of 14.1% seen at the end of February.

As Beijing’s fiscal stimulus package explained during the National People’s Congress in early March, the focus for the year will be to move up the value chain in the manufacturing sector and boost infrastructure projects. Indeed, the investment destination and funding source confirmed good implementation of such policy measures. However, private sector and foreign investor sentiment remain subdued. We expect public investment to continue leading among other investors this year, which should spillover into the broader economy.

Less exciting readings from retail

In March, retail sales grew by 3.1% yoy, slowed from a rise of 5.5% in February. Both sales in consumer goods and catering cooled somewhat – growing by 2.7% and 6.9%, respectively from 4.6% and 12.5% in February. Sales in services increased by 10% in Q1, down from the 12.3%. Household appliance sales stayed strong, growing by 5.8% in March, up from 5.7% in February. However, auto sales reversed to a decline of 3.7% in March, from a solid increase of 8.7% in February.

Annual figures this year were partly affected by base effects, with higher levels last year following the initial boost of consumption appetite following the lifting of lockdown measures. Nevertheless, early signs of a reduced propensity to save started to emerge with a decrease in M1 to M2 ratio in March. Moreover, consumption of big-ticket goods seemed to follow the direction of the policy measures – the rise in household appliances came after Beijing’s initiative of the home appliances trade-in and upgrade. Auto sales, which had a strong performance in the past two years benefitting from the trend of decarbonisation, now started running out of steam.

Good news from Q1 may lower the future expectation for policy support

The solid GDP growth in Q1 has eased gloomy sentiments in the market somewhat. However, it could also ease the pressure that government officials face and therefore slow policy momentum in the near term. Given the persistent drag from the property sector downturn and the dent in consumer confidence in the past years, this year’s growth needs to be backed by the supportive measures from Beijing. The better-than-expected reading in Q1 indeed is much needed for the country, but was mainly a reflection of supportive policies. While a good reading may curb the strength of future policy support and risk losing the good momentum that just gained.

On the back of the stronger Q1 GDP figure, we revised up our GDP forecast for the year to 5.0%, seeing the economy on track to achieving this year’s growth target. On the policy front, we expect the authorities stay supportive and continue maintaining an effective implementation of announced policy measures. In addition, we see a reduced possibility of policy rate cuts but maintain the likelihood of a 50bps cut in RRR for this year.