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16 Apr 2021 By Pete Sweeney, Yawen Chen

The Chinese economy has managed to make double-digit economic expansion look disappointing. Output grew 18.3% year-on-year in the first quarter of 2021, but that was less than expected given last year was so dismal. Compared to the previous quarter, the recovery lost a surprising amount of steam. With limited monetary policy options, fiscal stimulus appears to be slowing at the worst possible time.

Given last year’s low base, quarterly comparisons are more useful. Apart from a bright spot in retail sales – a muddy indicator that also captures government spending – bad news leapt out from Friday’s economic readings. Having grown 2.6% in the fourth quarter, activity expanded only 0.6% in the first three months of 2021, where analysts polled by Refinitiv had expected 1.5%. Worse news came from the services sector, a major employer and supposedly the future of the Chinese economy, which contracted outright per Capital Economics estimates.

In the background is rising inflation driven by higher input prices and American stimulus, which prompted March factory gate prices to leap up 4.4%, the fastest rate since 2018. That’s fine for state-owned commodity producers but private manufacturers have been hit hard. Some are seeing as much as a 30% spike in costs this year for raw materials such as PVC, widely used in products including shoes.

The central bank cannot move on rates, however. Easier policy would further inflate a hot housing market and slow a broader deleveraging project. Lifting rates and reining in credit supply, on the other hand, could hurt struggling businesses by increasing the cost of credit, and might also push up the exchange rate, which could cut into export competitiveness.

That leaves the Ministry of Finance on the hook for fiscal stimulus, but officials may be more worried about mounting government debt. New local government bond issuance intended to support stimulus investment slowed sharply in the first quarter – just 2% of the 1.5 trillion yuan ($230 billion) in the same period of 2020. As China’s self-satisfaction about its pandemic response wears off, and with the vaccination programme off to a slow start, this is no time to take the foot off the stimulus pedal.


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