Whalesbook
Exports Boosted by AI, But Domestic Demand Falters
China's economy showed a mixed picture in April. Exports, driven by the global surge in AI investment, held up well. However, domestic economic activity weakened significantly. Industrial production grew only 4.1% annually, the slowest rate in nearly three years and well below economists' expectations of 5.63%. Retail sales also weakened, rising just 0.2% in April. This was a sharp slowdown from March's 1.7% growth and the weakest performance since China's COVID-19 reopening in December 2022. Domestic car sales continued to fall, dropping 21.6% in April, marking the seventh consecutive monthly decline.
Investment Shrinks, Showing Deeper Economic Issues
The problems extended to fixed-asset investment, a key sign of future economic growth. For the first four months of 2024, this measure unexpectedly shrank by 1.6%, down from 1.7% growth in the first quarter. This drop is concerning, especially as infrastructure investment grew strongly by 8.9% in Q1. This suggests weakness is focused in manufacturing and property. Property investment, a continued source of pressure, fell 13.7% in January-April. The urban unemployment rate edged down to 5.2% in April, a small improvement but still pointing to employment challenges.
Exports Shine While Domestic Spending Lags
Analysts describe China as operating at "two speeds." High-tech manufacturing and key exports are doing well, but consumer confidence and domestic spending are lagging. In the first quarter, China's GDP grew 5.0%, meeting Beijing's target. This growth was mainly fueled by a 14.7% surge in exports and strong results in high-tech sectors like integrated circuits and AI. This export strength, particularly in areas like electric vehicles, batteries, and machinery, is benefiting from global AI investment. However, this external performance is not enough to make up for domestic weakness. This pattern has been seen before, but it is now made worse by rising global oil prices linked to the Iran war.
Policymakers Watchful Amid Global Pressures
In response to these different trends, China's top policymakers seem to be taking a wait-and-see approach. Despite the growing gap between domestic demand and supply, they have stuck to previous policy statements, giving no clear sign of new stimulus measures. This cautious stance, along with plenty of market liquidity, suggests they prefer to let current trends continue rather than introduce widespread support. The National Bureau of Statistics noted the complexity, saying, "the external situation is complex and changing, and the problem of strong supply and weak demand remains prominent." Globally, the US manufacturing sector showed strong growth, with its PMI rising to 54.5 in April. India's inflation rose slightly to 3.48% in April, staying below the central bank's target.
Risks: Over-reliance on Exports and Outside Shocks
While China's export sector, especially in high-tech areas, is dynamic, it is unlikely to sustainably support the entire economy. Relying on external demand carries risk, particularly with rising oil prices globally due to the Iran war. Goldman Sachs Research pointed to slowing demand from rising energy prices, projecting China's GDP to slow to 4% on a quarter-over-quarter annualized basis in the second quarter of 2024. The IMF also revised its 2024 growth forecast for China downwards to 4.4%. The continued shrinkage in fixed-asset investment, particularly in the private sector and real estate, shows low domestic confidence and poses a risk to future growth. The focus of export growth on specific high-demand products, while showing competitiveness, also questions the overall economic health. The cautious policy approach, without strong measures to boost domestic spending, increases concerns about the economy's ability to handle these challenges without a deeper slowdown.
Outlook: Challenges Ahead for China's Economy
The outlook for China's economy for the rest of 2024 depends on how long its export strength can last, given slowing global demand and ongoing domestic spending issues. The government's target remains 4.5% to 5% GDP growth for the year. However, the current path, seen in an export-led recovery hiding domestic weaknesses and a slow policy response, suggests meeting this goal could be difficult without a major change in economic trends or policy action. The continued strength in high-tech exports offers some optimism, but it cannot fully make up for the widespread weakness in the domestic economy.