China’s first quarter growth rate of 18.3 per cent from a year earlier shows its economy has fully recovered to pre-pandemic levels, analysts said, but there is lingering uncertainty over the outlook due to Beijing’s plans to withdraw policy support. In the first three months, the Chinese economy expanded at its fastest rate since records began being published in 1993, but that masked a significant slowdown compared to the fourth quarter of 2020. Analysts have forecast annual growth in the April to June quarter to tumble given the first quarter figure came off a historically low base at the height of the pandemic last year. Major uncertainty remains over China’s economic outlook and, in particular, Beijing’s plan to withdraw support measures as it shifts emphasis back to reducing debt, which rose sharply during the pandemic. The People’s Bank of China injected huge amounts of liquidity into the economy last year to support growth, but in recent months it has begun warning about the risks of asset bubbles caused by excess liquidity. In a sign of official concern, authorities have imposed new measures in major cities to cool the country’s overheated housing market, which has been one of the biggest drivers of growth. The government has also scaled back fiscal support, reducing its budget deficit target and trimming the limit on local government borrowing, which has underpinned regional operations and infrastructure investment – another important economic engine over the past year. The uneven nature of China’s economic recovery poses a challenge for policymakers. Beijing is counting on increasing consumer spending to power future growth under its new “ dual circulation ” economic strategy, which emphasizes domestic self reliance to offset external uncertainties. But so far consumption has lagged behind industrial production and investment, especially as income growth among the lower and middle classes has been slow. Though the government hailed the latest GDP result as proof of the country’s positive momentum, it admitted recovery is not yet on solid ground. “The economic recovery in the first quarter of this year continued, and positive factors are accumulating,” said Liu Aihua, a spokeswoman for China’s National Bureau of Statistics (NBS). “At the same time, we must also see that the Covid-19 epidemic is still spreading globally, the international landscape is complicated and severe, the foundation for domestic economic recovery is not yet solid, and some service industries and small and micro enterprises are still facing more difficulties in their production and operation.” On first glance, China’s record-breaking gross domestic product (GDP) growth is impressive. But the figure was distorted because the year-on-year expansion was based on a historic 6.8 per cent contraction in the first quarter of last year. China GDP: Beijing sets moderate 2021 economic growth target as focus shifts to debt reduction Adjusted for inflation and seasonal factors like the Lunar New Year holiday, GDP growth was below expectations, slowing to 0.6 per cent in the first quarter from a 3.2 per cent quarterly growth rate in the last three months of 2020. Still, most analysts took a glass-half-full approach to the data, while pointing out uncertainties in the outlook. Ding Shuang, chief Greater China economist at Standard Chartered Bank in Hong Kong, said the first quarter figures indicate China’s economy had “basically recovered to the pre-pandemic level”, and financial markets were now watching to see whether Beijing will withdraw more stimulus. “But there are still many things to worry about,” he said, citing the structural imbalances in the economy, including signs of overheating in the industrial sector and a subdued retail sector. The good news is that the economy has recovered from the hiccups and is set to make up the lost ground in the second quarter Aidan Yao The recent rise in commodity prices could also erode company profits and affect the scale of business investment, he said. He predicted growth would fall to 7 per cent year on year in the second quarter. Aidan Yao, senior emerging Asia economist for AXA Investment Managers, said the “very impressive headline number” masked a slowdown caused by a virus resurgence in some parts of China at the start of the year. “The good news is that the economy has recovered from the hiccups and is set to make up the lost ground in the second quarter,” he said, noting the strong 1.75 per cent rise in retail sales in March compared to the previous month. Xu Jianwei, senior China economist at investment firm Natixis, said that consumer spending had a ways to go before it would be the primary driving force in the economy. Less generous fiscal and monetary policy will weigh on infrastructure and real estate investment Louis Kuijs In the first quarter this year, consumption accounted for about 61 per cent of Chinese residents’ disposable income on a per capita basis, lower than 65 per cent in the first quarter of 2019, NBS data showed. Per capita consumption grew 8 per cent over the two-year period, while per capita income went up 14.6 per cent. “This means that consumption had not grown as fast as income,” Xu said. “But this is understandable because globally the pandemic is not over. People are still cautious about spending, which is affected by many factors including relaxation of social distancing.” Louis Kuijs, head of Asia Economics at Oxford Economics, said he expects Chinese growth to gain momentum in the second quarter, but that the drivers of growth would change. “Less generous fiscal and monetary policy will weigh on infrastructure and real estate investment, while improved profitability and confidence should buoy corporate investment and consumption, although a full rebound in household spending hinges on convincing vaccination and further improvements in labour market conditions,” Kuijs said. Yue Su, principal economist for China at The Economist Intelligence Unit, predicted that Beijing would introduce more economic support measures in the second half of the year “when the export contribution gradually decreases as the supply of the rest of the world picks up.” She said production and exports might have been boosted in the first quarter by firms “front-loading” orders in anticipation of a slowdown in demand as the rest of the world rebounded from the pandemic. “This means, trade performance and domestic industrial activities for the rest of year might not be able to maintain such strong momentum, due to lack of measures to stimulate domestic economy,” she said. Additional reporting by Sidney Leng and Frank Tang