China’s economy is facing a complex outlook that will test its leaders. First-quarter gross domestic product growth does not reflect it. At 4.8 per cent growth year on year, stronger than 4 per cent in the previous quarter, it exceeded market expectations. The trend is in line with the goal of 5.5 per cent for 2022 set by Premier Li Keqiang in his recent annual work report. But the future is heavily clouded with uncertainties and negative factors. Chief among them are the current Covid-19 outbreak in Shanghai and the war in Ukraine. The full effects are more likely to show up in second-quarter GDP growth. In the January-March quarter, fix-asset investment and industrial production drove GDP growth. But consumption and retail spending – gauges of consumer sentiment – fell faster than expected, even before Shanghai’s lockdown and the war’s effect on commodity prices were reflected. Politically speaking, employment rates are even more important. The surveyed jobless rate in March of 5.8 per cent is higher than the target of “within 5.5 per cent”. Keeping the Covid outbreak under control will be critical to reversing a worrying trend. To be sure, the central government has some powerful tools to stimulate the economy, such as deep reserves, and supply-side pressures may be expected to ease once the coronavirus outbreak is brought under control. But there are other factors that are beyond its reach and which remain unclear, such as how long the Ukraine war may affect global energy and food markets. The United States will further raise interest rates, prompting the outflow of capital back to the US. China’s central bank, in response, has cut the proportion of deposits banks must keep in reserve to boost liquidity and help the economy, rather than cut rates. If the rates spread between China and the US becomes too big, it would escalate capital outflow. External uncertainties are compounding geopolitical tensions, with US President Joe Biden hosting a summit with Southeast Asian nations next month at which China can expect to be targeted, while tensions over the Taiwan Strait are building up. Investors, spooked by visions of a Ukraine-like crisis in Asia, are adjusting. Ahead of a sensitive leadership reshuffle in October, stabilising such a fluid situation is an acid test for President Xi Jinping and his team. This raises an intriguing dimension. Normally, before a once-in-a-decade leadership reshuffle, there is little appetite for risks that may come with drastic policy changes. Yet the unprecedented situation that China now faces may call for bold moves. So far Xi has moved to bolster the country’s energy and food reserves. And among the major economies, China is facing less inflation pressure. But the uncertainties are growing. Safe harbour in unsettled waters remains over the horizon.