China’s factories and consumers are kicking off the year with a bang, but roadblocks lie ahead


HONG KONG—China’s economy got off to a flying start this year as factories churned out more goods and consumers dipped deeper into their wallets.

But while industrial production and retail spending in the first two months both beat analysts’ expectations, a fast-spreading Covid-19 outbreak and the impact of war in Ukraine threaten to bring a premature end to party and challenge China’s economic growth goal. about 5.5%.

Industrial production in the first two months of the year rose 7.5% from a year earlier, accelerating from December’s pace of 4.3% and more than double the 3.5 % expected by economists surveyed by the Wall Street Journal.

Retail sales, an indicator of household consumption, rose 6.7%, beating the 4.3% expected by economists surveyed. Foodservice sales, including restaurants, grew at a faster rate than goods sales for the first time since last July.

Investment in fixed assets rebounded strongly, up 12.2% in the first two months from a year earlier, beating economists’ forecast of 5% and the pace of 4.9% at the same period last year.

Investment in infrastructure projects increased by 8.1% from the previous year, an indicator that the authorities plan to rely on more state-funded projects to stimulate growth as the contribution of exports diminishes and that the difficulties of the real estate sector drag on.

Shanghai this week. The Covid-19 outbreaks in China have triggered widening lockdowns.


Photo:

alex plavevski / Shutterstock

Defying market expectations, the central bank kept the key rate unchanged on Tuesday. Still, Goldman Sachs economists expect further easing measures in the coming months, such as cuts to the key interest rate and reserve requirement ratios for banks.

Despite better-than-expected official data, China’s overall growth remains unbalanced, with signs of lagging demand and growing pressure on the job market.

General credit expansion slowed to 10.2% in February from 10.5% in January, slowing for the first time since September. In February, new medium- and long-term household loans, mainly mortgages, contracted for the first time since 2008, signaling that confidence remains weak even after banks in some cities cut mortgage rates. to stimulate demand.

Home sales in value in the first two months fell 22.1% from a year earlier, the biggest drop since March 2020, when the eruption of the Covid-19 pandemic dealt a blow hammer to the Chinese economy. Real estate investment rose 3.7% from a year earlier, compared to a pace of 4.4% for all of 2021.

China’s official unemployment rate in February was 5.5%, up 0.4 percentage points from the end of 2021, while the youth unemployment rate fell from 14.3% to 15.3%.

“Given the downward pressure on organic growth, I think hitting a 5.5% target is really, really tough,” said Louis Kuijs, chief Asia economist at S&P Global Ratings. Beijing set itself a 2022 growth target of around 5.5% in early March, a target considered ambitious by many economists given the multiple headwinds.

Chinese manufacturers are facing rising raw material and raw material cost profits. Prices for some commodities, including nickel and wheat, have risen to decade highs, fueled by the war in Ukraine. Slowing global growth could weaken demand for Chinese exports.

China saw a sharp economic slowdown in the third quarter as its pandemic rebound fades – and now Beijing is tackling longer-term issues including household debt and energy consumption. WSJ’s Anna Hirtenstein explains what investors are looking at. Photo: Long Wei/Sipa Asia/Zuma Press

“Geopolitical changes have had a relatively obvious impact on global commodity prices, and China may face growing pressure from imported inflation,” National Bureau of Statistics spokesman Fu Linghui said on Tuesday. adding that the direct impact of the Russian-Ukrainian conflict on the Chinese economy would be limited, as the two countries are minor trading partners with China.

A new wave of Covid-19 outbreaks, with the highest number of daily cases reported since the start of 2020, has triggered lockdowns and factory closures that threaten both exports and domestic demand for services .

The Covid outbreaks pose the biggest downside risk to China’s economy and make the government’s 5.5% growth target more difficult, said Yi Xiong, chief China economist at Deutsche Bank. The bank forecasts growth of 4.5% in the first quarter compared to the previous year and a pace of 5.1% for the full year.

Hundreds of Covid-19 cases have been detected over the past two weeks in Shanghai and Shenzhen, two of China’s largest cities, which together account for around 6.5% of the country’s GDP, prompting authorities to shut down schools and factories, to restrict thefts and to organize mass thefts. test.

In Shenzhen, a crucial manufacturing hub with more than 17 million people, factories including suppliers to global brands such as Apple have temporarily closed. School was suspended this week in Shanghai and flights to and from the city were halted.

If more cities adopt strict shutdowns, such as that of Shenzhen and late last year in Xi’an, the disruption of factory production could worsen global supply chain problems.

Economists at ANZ, a bank, predict that a week-long lockdown of affected regions could slash GDP growth by up to 0.8 percentage points. If more cities follow suit, half of China’s GDP and population could be affected this time around, they said in a note on Monday.

Also on Monday, Morgan Stanley predicted that China’s economy is unlikely to grow in the first quarter compared to the previous one. The bank also cut its full-year GDP outlook to 5.1% as authorities ‘double down’ on the zero-Covid policy.

Write to Stella Yifan Xie at stella.xie@wsj.com

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