Newsroom International

China's Economy Surges in Q1 as Covid Restrictions Ease, but Uneven Recovery Raises Concerns

20 April 2023 Written by Staff Writer

In the first quarter of 2023, China's economy demonstrated stronger growth than anticipated, fueled by the lifting of strict Covid restrictions which previously hampered businesses and consumers. Nevertheless, global economic slowdowns pose challenges to a smooth recovery in the upcoming months.

The National Bureau of Statistics released data on Tuesday indicating that China's gross domestic product (GDP) increased by 4.5% year-on-year during the first quarter. This rise exceeds the 2.9% growth of the previous quarter and outpaces the 4% expansion predicted by analysts.

The gradual removal of Covid restrictions in December, combined with a three-year easing of regulatory scrutiny for technology companies and property, has led investors to scrutinize the first quarter's data for indications of recovery. Matt Simpson, a senior market analyst at City Index, remarked that China's Q1 results were "decent" and kept the country on track for a growth target of around 5% for the year. However, lingering concerns suggest that this initial momentum may falter in the second or third quarters.

China's economic revival has been uneven thus far. While consumption, services, and infrastructure spending have improved, the slowing of prices and a surge in bank savings raise questions about demand. In terms of quarter-to-quarter basis, GDP grew by 2.2% from January to March, which is consistent with analyst expectations and an increase from the previous quarter's revised 0.6% growth.

To maintain stability in the $18 trillion economy, Chinese policymakers are committed to increasing support this year while simultaneously addressing unemployment, debt risks, and structural issues. The economy experienced one of its worst slumps in nearly 50 years in 2021 due to Covid restrictions.

China's central bank announced plans to maintain ample liquidity, stabilize growth and jobs, and focus on expanding demand. Despite this, the bank maintained the rate on medium-term lending facility loans unchanged, suggesting that authorities are not overly concerned about the immediate growth outlook.

Reuters analysts predict China's economic growth to accelerate to 5.4% this year, compared to 3% in 2021. The Chinese government has established a modest target of around 5% economic growth for 2023, after falling short of its goal the previous year. In March, the central bank lowered lenders' reserve requirements for the first time in 2023, and the government has introduced additional fiscal stimulus.

Data released on Tuesday also indicates that retail sales growth accelerated to 10.6% in March, exceeding expectations and reaching a nearly two-year high. Factory output growth also increased but fell slightly below predictions. Year-on-year fixed asset investment growth in January-March slowed to 5.1%, compared to the anticipated 5.7% increase.

China Minsheng Bank's chief economist, Wen Bin, suggested in a research note that current market worries about deflation reflect concerns about the economic recovery's strength and sustainability. While the production side has mostly returned to pre-pandemic levels, demand-side momentum remains weak, presenting ongoing challenges for China's economic resurgence.