Commentary on Political Economy

Thursday 18 April 2024


Making Sense of China’s Magical 5.3% Growth

Strong first-quarter numbers are puzzling the Chinese, who witness a stagnant economy daily. Two factors reconcile the difference.

Strong GDP is puzzling the Chinese.
Strong GDP is puzzling the Chinese. Photographer: Raul Ariano/Bloomberg


China’s first-quarter 5.3% growth handily beat expectations and Beijing’s own target of “around 5%.” But if you ask households, companies and even the taxman, the reality on the ground feels a lot less rosy.

By the end of 2023, only 9.5% saw good job prospects, according to the central bank’s latest urban depositor survey. Preparing for rainy days, households added 8.6 trillion yuan ($1.2 trillion) in their savings in the first quarter, prompting some banks to discontinue long-term fixed-income offerings to protect their margins. The CSI 2000 Index, whose small-cap companies are more sensitive to business cycles, is down 20% for the year. Meanwhile, as of February, government fiscal revenue fell 2.3% from a year ago.

Accusations that China is cooking its economic-expansion statistics have been around for decades. But to understand its economy and political system better, one should try to reconcile and make sense of the difference between the headline number and people’s daily perceptions. As far as I can see, two forces are at play.

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First, the economy is experiencing its longest deflationary streak since 1999. As such, the 5.3% increase in real gross domestic product doesn’t offer useful insights into stagnant income growth experienced by workers and corporations, whose earnings are in yuan terms. Indeed, in the first quarter, nominal GDP notched only 4.2%. Household disposable income increased by 6.2%, well below pre-pandemic levels.

The New Normal

Prolonged deflation means headline growth will be higher

Source: Bloomberg

Manufacturing was the main growth engine, driven by strong exports and new energy-related investments. The 6.4% increase validated President Xi Jinping’s conviction that high-end industrial upgrades can eventually replace real estate’s prominent role and pull his economy out of its slump.

However, one hardly expects those in the electric vehicle supply chain to be feeling cheerful. Many wonder if strong exports can last. Trade tensions and protectionism are once again on the rise. German Chancellor Olaf Scholz and US Treasury Secretary Janet Yellen expressed worries in recent trips to China that the vast output of factories there have become a global problem.

Indeed, the industrial capacity utilization rate fell to 73.8% last quarter, the lowest on record other than the early pandemic days when much of the country was in lockdown. In the first three months of the year, a price war erupted and escalated — market leaders BYD Co. and Tesla Inc. sacrificed profit margins for sales volume — in turn worsening producers’ price deflation in China.

A New Trade War?

Overcapacity at home prompts Chinese factories to sell overseas, cheaply

Source: Bloomberg

The second factor has to do with how China calculates quarterly GDP. It uses a so-called production account, which prioritizes the value-add of each industry and brushes away end demand.

Manufacturers may have been replenishing their inventories — as of February, the latest data available, stockpiles grew 6.8% from a year earlier, an uptick from late 2023. What this also means is that in the future, companies might sell products out of their storage rooms before producing more, which would put pressure on China’s GDP later in the year.

Inventory Matters

Manufacturers' inventory growth ticked up early in the year

Source: Bloomberg

As China undergoes structural transitions, it’s becoming harder to read the economy and figure out when and where it bottoms. That the government is quick to stop providing insightful statistics doesn’t help either. More than before, one needs to sift through minute data series that the general public doesn’t pay much attention to and are thus less likely tempered. Those who can only read the headline numbers don’t know China.

More From Bloomberg Opinion:

  • Vanke’s Denials Say Everything About China Property: Shuli Ren
  • China EV Trade War Would Be Self-Defeating: David Fickling
  • China’s Hands Are Tied Against Web of US Alliances: Minxin Pei

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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. A former investment banker, she was a markets reporter for Barron’s. She is a CFA charterholder.
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How China Can Help Lower Tensions Between Israel and Iran

Beijing has always said it wants to play a bigger diplomatic role. Working with Washington to reduce tensions in the Middle East is a good first step. 



Xi Jinping has a favorite phrase: “The world today is undergoing major changes unseen in a century.” The Chinese leader has repeated it in international summits, work party conferences, and even during a conversation with Russia’s President Vladimir Putin. It is a revealing insight into his global view, and the Iran-Israel conflict fits right into that.

Beijing has an opportunity to step up and play the role of diplomatic problem solver in this increasingly volatile situation. This would allow the world’s second-largest economy to build goodwill not just with the US, with which it has a fractious relationship, but also cement its reputation as a leader in the Global South, one of Xi’s key ambitions. That the president has chosen not to proactively do this is a telling sign of his ambivalence about intervening in a time of crisis.

China’s ties with Iran go back centuries, particularly when it comes to trade. That helped to build cultural ties, too, along the ancient Silk Road. The two nations share many similarities — both have previously been run by imperial dynasties and then faced revolutions that transformed their nations. But it is their shared antagonism of the West’s domination in the post-World War II era that binds them together the most. They believe that the US is trying to foment regime change and are wary of Western cultural influence on their citizens.

Tehran and Beijing’s cooperation isn’t simply philosophical — there is a strong transactional incentive, too. China faces a crucial energy security issue and now imports more than two-thirds of its oil needs — much of that from Saudi Arabia and Iran.

It’s not surprising that the global diplomatic position it says it wants to occupy has yet to manifest. China has offered to facilitate dialogue between Israel and Palestine, extending the same two-state solution proposal it has for years, and helped to broker a detente between Saudi Arabia and Iran. Yet its proposals are often dismissed as unrealistic and overly simplistic for the complex geopolitical issues its seeking to resolve.

The US, however, does see China’s role as significant, particularly the influence it may be able to wield over Tehran. On Monday, the US House of Representatives overwhelmingly passed legislation aimed at countering China’s purchase of Iranian crude oil, as part of a package of bills in response to Iran’s attack on Israel. About 80% of Iran’s roughly 1.5 million barrels a day of oil exports are sent to independent refineries in China, according to the bill, which says that any transaction by a Chinese financial institution for the purchase of oil from Iran qualifies as a “significant financial transaction” for sanctions purposes. The legislation now moves to the Senate, where it faces an uncertain fate.

That the US is attempting to curtail China’s economic ties with Iran reflects how important Washington thinks that relationship is, but also how much it wants Beijing to take a leading role in this crisis. It had asked China to urge Tehran not to retaliate against Israel for its air strike on the Iranian consulate in Syria. Yet all that China’s top diplomat has done is to tell Iran that it is ready to keep working with it in the future. “China is ready to steadily advance practical cooperation in various fields with Iran and promote greater development of China-Iran relations,” Foreign Minister Wang Yi told Iranian counterpart Hossein Amirabdollahian in a phone call on Monday, after Iran’s failed drone and missile barrage against Israel over the weekend.

Beijing achieved relative success from that phone call, with the Iranian foreign minister saying his country is aware of the regional tensions, willing to exercise restraint and has no intention of further escalations. But China stopped short of condemning Tehran’s retaliation, saying it saw it as “a spillover of the Gaza conflict.”

This is a not-so-veiled jibe at the Biden administration’s handling of the geopolitical fallout from the Israel-Hamas war. Beijing consistently tries to needle Washington by highlighting its failure to rein in the Israeli Prime Minister Benjamin Netanyahu after the brutal attack on his country by Hamas on Oct. 7. That killed 1,200 people, while 250 others were taken hostage. Meanwhile, Tel Aviv’s retaliatory attack on Gaza has killed more than 33,000 Palestinians and displaced 1.7 million, or 75% of Gaza residents, according to the Office of the United Nations High Commissioner for Human Rights.

The US and China could use this opportunity to work together to defuse tensions. This month, defense ministers on both sides spoke for the first time in nearly 18 months, while President Joe Biden and Xi had a phone call after their face-to-face meeting in November. This is promising, and could be used as a model for closer cooperation in other areas, like the Israel-Iran conflict. Beijing has had ample opportunity to change the status quo. It’s time it started doing that.

More From Bloomberg Opinion:

  • Putin and Xi Are More Divided Than Ever. And More United: Minxin Pei
  • To Talk or Not to Talk to China: Andreas Kluth
  • It’s Bad for the World When Xi Chooses Not to Show Up: Karishma Vaswani

Want more Bloomberg Opinion? OPIN <GO> . Or you can subscribe to our daily newsletter.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Karishma Vaswani is a Bloomberg Opinion columnist covering Asia politics with a special focus on China. Previously, she was the BBC's lead Asia presenter and worked for the BBC across Asia and South Asia for two decades.
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