GDP surprises at 5.3%

First step towards target – but consumption still a dud

• China's economy expanded by 5.3% y/y in Q1:24, exceeding expectations. This is also an increase from 5.2% growth in Q4:23.
• The Chinese government has implemented proactive economic strategies, focusing on policy harmonization across various sectors, enhancing security, providing fiscal support, and increasing monetary resources to sustain growth.
• The industrial sector contributed significantly to GDP growth in Q1:24, accounting for two percentage points (pps) of GDP growth. Industrial output hit a 23-month high, surpassing pre-pandemic averages. However, there was a sharp slowdown in March.
• Fixed asset investment accelerated in early 2024, with infrastructure and manufacturing investment showing strong growth, offsetting the ongoing challenges in the real estate sector.
• To this end, the central government has increased its spending and extended resources to weaker provinces, while economically robust provinces have been asked to carry a greater load, leveraging their unfettered access to special purpose bonds (SPB). 
• The People’s Bank of China (PBoC) has also been particularly active, injecting liquidity into the financial ecosystem via its medium-term lending facility (MLF) and pledged supplementary lending (PSL) — in large part because banks are unable to continue to extend loans at the pace of before.
• Despite efforts to boost confidence and domestic consumption, such as promoting trade-in programs for consumer goods, household insecurity remains a significant challenge. Worryingly, retail sales growth slowed significantly in March 2024, with weak consumer sentiment affected by the ongoing property slump and the economies structural slowdown.
• China's shift towards a consumption-driven economy involves complicated dynamics, including employment concerns for low-skilled workers, job creation for university graduates, and strategic shifts in investment from traditional to emerging sectors such as renewable energy and advanced manufacturing.
• Policymakers are focused on enhancing productivity across sectors to ensure that the benefits of improvements are passed to households through better quality and cost-effective products. Time will tell if this proves successful.
• For now, the investment-led growth model likely has a few more years to run, debt-to-GDP is likely to continue to rise, and economic growth is now likely to be higher over the near- and medium-term than previously thought. 
• Therefore, the mismatch in supply and demand is set to continue throughout 2024, heightening offshore concerns about the role of exports and deflationary pressures within the economy.