• Consumption Trends – As the impact of COVID-19 outbreaks in January abated, retail sales growth improved in March from the January-February period. As we have discussed previously, consumption recovery has been lagging industrial production. Ongoing weakness in employment and household income growth are among the primary culprits, but vaccination progress should bear positive influence.  

• Trade Trends – As pandemic-related demand diminishes in the US and Europe – i.e. for PPE and home electronics, etc. – China’s export growth has started to moderate as expected. But the strong recovery of the advanced economies and global trade should see demand for Chinese exports remain relatively high through the rest of the year. External demand is expected to remain a key driver of China’s growth over the short term.

Implications for Business

Although China’s growth momentum softened in Q1, it is not necessarily a sign of a deteriorating macro-environment. Because the growth in Q4 last year exceeded the pre-COVID-19 trend growth, and was probably above China’s long-term potential growth range, the current moderation signals a transition of the Chinese economy from recovery mode to pre-COVID-19 trend growth - in other words, “normalization”. Monetary policy and trade performance are both normalizing, for example, and this will necessarily see China’s topline growth slowdown from Q4 last year. Over the short term, producer price inflation poses some risk. If it intensifies and bites hard on manufacturing profits, then manufacturing investment growth – an important growth driver and offset to the expected slowdown in both real estate and infrastructure investment over the short- to medium-term – will likely decrease. Members should brace for the looming shift in growth dynamics that, whilst normal, could be bumpy.