China’s economy expanded faster than expected in the first quarter but official data revealed a recent contraction in consumer activity as sweeping Covid-19 lockdowns clouded the country’s growth outlook.
The figures came as the IMF warned countries including China that large increases in private debt accumulated mainly by companies and low-income households during the pandemic were likely to significantly slow the recovery in the years ahead.
The first signs of a slowdown were evident in Chinese retail sales, which fell 3.5 per cent in March compared with the previous year. The drop took the shine off China’s 4.8 per cent annual gross domestic product growth rate in the first quarter, which beat expectations of 4.4 per cent growth. On a quarter-on-quarter basis, GDP grew 1.3 per cent.
The data will heap greater pressure on President Xi Jinping’s government, which has reaffirmed its commitment to a zero-Covid policy despite the mounting costs and disruption across the country’s biggest cities.
Shanghai, the country’s financial hub, has been largely sealed off for weeks, the most striking example in a new wave of lockdowns that initially included the manufacturing hub of Shenzhen and cities in the north-eastern province of Jilin last month.
The lockdowns came at a precarious moment for China’s economy following a debt crisis in its real estate sector and a wider loss of momentum. The government has targeted growth of 5.5 per cent in 2022, which would be its lowest annual rate in three decades.
Fu Linghui, a spokesperson for the National Bureau of Statistics, said “the operation of the economy was generally stable” but pointed to “frequent outbreaks” of Covid in China and an “increasingly grave and complex international environment”.
Tommy Wu, lead China economist at Oxford Economics, suggested that the 4.8 per cent GDP increase “mainly reflects the growth seen in the official January-February data before the weakening in economic activities in March”.
Last month the official Chinese unemployment rate rose to 5.8 per cent, its highest level since May 2020.
In contrast to the sudden weakness in consumer spending, industrial production, which was a big driver of China’s initial recovery from the pandemic in 2020, added 5 per cent year on year in March. Fixed asset investment rose 9.3 per cent in the first three months of 2022 compared with the same period last year.
The IMF warned on Monday that private debt accumulation across the world would act as a drag on growth as households and companies prioritised paying interest and reducing the amount they owed rather than spending and investment.
It forecast that over the next three years, deleveraging would knock 0.9 per cent off GDP in advanced economies and 1.3 per cent off emerging markets’ output levels. The IMF and World Bank’s spring meetings began in Washington on Monday.
Although many better-off consumers saved money during lockdowns, the pandemic forced lower-income households to take on more debt. Overall private debt increased by 13 percentage points of GDP in advanced economies and by almost as much in China during the pandemic, the fund said.
The drag on growth would be worst in countries that had increased debt in poorly performing sectors, where governments were also trying to lower borrowing, where interest rates were rising fast and where inefficient insolvency regimes were not in place.
Even before the Chinese outbreak of the highly infectious Omicron variant gathered pace, the country’s economy had been hit by a real estate crisis centred on indebted developer Evergrande that spread across the property sector.
In a sign of the lingering effects of that crisis, new housing starts for apartments declined 20 per cent in the first three months of the year. Steel and cement production fell 6 and 12 per cent, respectively, in the same period.
The government has lowered official growth targets as it has embarked on an easing of monetary policy, which has included cutting crucial lending rates for the first time since 2020 despite a previous push to reduce leverage.
The People’s Bank of China on Friday reduced the reserve requirement ratio for banks by 25 basis points in an effort to inject liquidity into the financial system.
Xi, who is this year seeking an unprecedented third term in power, has promoted a “common prosperity” campaign designed to reduce inequality. But lockdown measures now dominate the country’s economic trajectory and have stoked global anxiety over supply chain disruptions.
Li Keqiang, China’s premier, has cautioned repeatedly in recent weeks of economic risks, following a warning from Xi in March of the need to minimise the economic impact of Covid policies.
The CSI 300 index of Shanghai- and Shenzhen-listed stocks fell about 1 per cent on Monday after the data release. Banks were among the worst performers as lenders faced the prospect that policy easing to cushion the economic blow of lockdowns might hurt profits.
“We definitely think that Chinese policymakers are willing to make sure they reach their growth targets,” said Jean-Charles Sambor at BNP Paribas Asset Management.
Additional reporting by Hudson Lockett in Hong Kong and Maiqi Ding in Beijing