Making sense of China’s magical 5.3% growth

By Shuli Ren

China’s first-quarter 5.3 per cent growth handily beat expectations and Beijing’s own target of “around 5 per cent.” 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 per cent 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 per cent for the year. Meanwhile, as of February, government fiscal revenue fell 2.3 per cent 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.

First, the economy is experiencing its longest deflationary streak since 1999. As such, the 5.3 per cent 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 per cent. Household disposable income increased by 6.2 per cent, well below pre-pandemic levels.

Graph showing China's GDP growth.

Manufacturing was the main growth engine, driven by strong exports and new energy-related investments. The 6.4 per cent 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 per cent 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.

Chinese factories' capacity utilisation

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 per cent 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.

Manufacturers' inventory growth.

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.