Inside China's First Quarter Economic Expansion

by Alaistair Chan and Katrina Ell, Moody's Analytics, 12 May 2011

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Risk Management

tags:
China exports food inflation GDP inflation retail sales tightening measures

The Chinese economy performed solidly in the first quarter of 2011.
Recent efforts to rein in growth have not had a dampening effect.
Further monetary tightening is expected.

China's first-quarter data were a little stronger than expected. Although the economy is slowing into what appears to be a ‘soft landing,’ further tightening measures are needed to prevent a breakout in inflation.

Robust performance

China’s position as the growth engine of Asia was further cemented with data showing the economy recorded a robust performance in the opening three months of 2011. The economy grew 9.7% on a year-ago basis. Growth in the services industry and secondary industry – mining, manufacturing, construction and utilities – drove the strong result.

One change with this data release is that the National Bureau of Statistics began releasing quarter-on-quarter GDP estimates, a positive step that will help observers better gauge the state of the economy. It indicated a 2.1% q/q expansion in the first quarter, or 8.7% annualised.

Given that the government is targeting 8% GDP growth for this year (and, according to the 12th five-year plan, 7% annual growth for the next five years), something similar to the first quarter or mildly slower is probably what the government is aiming for.

Industrial production maintained its double-digit pace through the first quarter. Heavy industry continued to drive the upbeat result, leading industrial production to grow 14.8% y/y in March – 0.1 percentage point weaker than in February. Meanwhile, industrial sector profits continued to grow at an impressive 30%-plus pace.

China recorded a US$710-million trade deficit for the first quarter, its first in seven years.

Some decline in China's trade balance had been expected, given the appreciation of the yuan and commodity stockpiling in the first quarter. But while it may seem that the government is making good on its target of stable exports and rising imports, a return to surplus is expected in the second quarter.

Despite expectations of subdued global demand, Chinese exports recorded 35.8% y/y growth in March, following the Lunar New Year-driven 2.4% gain in February. And stockpiling is likely to come under pressure as the government drains liquidity from the economy and borrowing costs increase.

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