The Chinese economy expanded 6.4 percent year on year in the first quarter of this year, 0.1 percentage point higher than the IMF forecast, with the GDP reaching 21.34 trillion yuan ($3.18 trillion), according to the National Bureau of Statistics (NBS) on April 17. The growth pace was the same in the last quarter of 2018.

The Chinese economy performed within an appropriate range in the first quarter, according to NBS spokesperson Mao Shengyong. "Market expectations are improving and positive factors are mounting," he told a press conference.

"The overall situation of China's economic growth presented a relatively stable momentum in the first quarter," Zong Liang, chief economist of Bank of China, said at Guoshi forum on April 17. He said it's not too hard for China to realize this year's target of 6 to 6.5-percent GDP growth. However, the Chinese authorities have said that instead of concentrating on the target, it's more important to pursue high-quality development.

"Compared to the end of 2018, China's economy presented a benign performance in the first quarter with some indicators registering a more-than-expected growth," Xu Hongcai, a Beijing-based economist, told Beijing Review.

He attributed the growth to the policy adjustments made at the Central Economic Work Conference last December where China's economic priorities were laid down. The government has implemented a more proactive fiscal policy and a prudent monetary policy, which is marginally looser.

Supportive measures

The fiscal policy plays a key role for this year's growth, Xu said. The government will reduce the tax burden on enterprises as well as their social security contributions by nearly 2 trillion yuan ($298 billion), according to the Report on the Work of the Government delivered by Premier Li Keqiang at this year's session of the National People's Congress, China's top legislature, in early March.

For example, a new batch of tax-cutting measures for small and micro businesses was rolled out on January 9 to save them 200 billion yuan ($30 billion) each year. Also, from April 1, importing enterprises have begun to enjoy cuts in value-added tax (VAT). For those previously paying 16 percent VAT, the rate is 13 percent, while those paying 10 percent now need to pay 9 percent. The reform will reduce businesses' VAT expenditure by around 225 billion yuan ($33.5 billion) this year, according to the General Administration of Customs (GACC).

The manufacturing sector and consumers are the biggest beneficiaries of the tax and fee reductions as the cuts will increase enterprises' liquidity and raise the purchasing power of consumers, according to a report by China International Capital Corp., a joint-venture investment bank.

The loosened monetary policy has also given impetus to the development of the real economy. In the first three months of 2019, new yuan-denominated loans increased by 952.6 billion yuan ($141.9 billion) year on year to reach 5.81 trillion yuan ($865.7 billion), the People's Bank of China (PBC), the central bank, said.

Newly added social financing totaled 8.18 trillion yuan ($1.22 trillion) in the first quarter, up 2.34 trillion yuan ($348.7 billion) from the same period last year, according to the PBC.

Lian Ping, chief economist of the Bank of Communications, said factors such as the relatively ample liquidity of the banking system after multiple targeted reserve requirement ratio cuts have created a favorable environment for the more-than-expected credit rebound. Credit financing to the corporate sector in the January-March period increased significantly compared with a year ago, indicating that credit support for the real economy has been significantly enhanced.

The troika

China's troika of growth drivers—investment, consumption and net export—presented a good momentum in the first quarter of this year. "Overall, the three factors from the demand side are boosting China's economic growth in a balanced manner," Zong said.

Fixed assets investment (FAI) stood at 10.19 trillion yuan ($1.52 trillion) in the first quarter, up 6.3 percent year on year, 0.2 percentage points higher than in the first two months. Investment in hi-tech manufacturing and services posted vigorous gains of 11.4 percent and 19.3 percent year on year, respectively. Private investment, accounting for around 60 percent of total FAI, outpaced the overall growth with a 6.4-percent year-on-year increase, according to the NBS.

This year, 2.15 trillion yuan ($320.4 billion) of special local government bonds are being issued, an 800-billion-yuan ($119.2 billion) increase on last year. The bonds will provide funding for key projects, laying a solid foundation for manufacturing investment.

Consumption, which has played a prominent role in driving the economy, contributed to 65.1 percent of GDP growth in the first quarter. It maintained stable growth with retail sales of consumer goods reaching 9.78 trillion yuan ($1.46 trillion), up 8.3 percent year on year, quickening from the 8.2-percent rise seen in the first two months. In addition, the per-capita disposable income of residents stood at 8,493 yuan ($1,265), up 6.8 percent year on year.

Foreign trade of goods climbed 3.7 percent year on year in the first quarter to 7.01 trillion yuan ($1.04 trillion), the GACC said on April 12. Exports increased by 6.7 percent year on year to 3.77 trillion yuan ($561.7 billion), and imports went up by 0.3 percent to 3.24 trillion yuan ($482.8 billion).

"China's economy has maintained stable growth this year, with economic indicators such as the manufacturing purchasing managers' index (PMI) for March pointing to upward momentum, which provided a sound environment for trade growth," Li Kuiwen, GACC spokesperson, said. China's manufacturing PMI came in at 50.5 in March, up from 49.2 in February, the NBS said on March 31. A reading above 50 indicates expansion and below that mark, contraction.

"The potential for trade cooperation between China and other countries participating in the Belt and Road Initiative is being unleashed, which is becoming a new driver for China's trade growth," Li said.

China's trade with other Belt and Road participants registered faster-than-average growth, with the combined trade volume standing at 2 trillion yuan, up 7.8 percent year on year.

Zhao Ping, Director of the International Trade Research Department, the Academy of China Council for the Promotion of International Trade, said China's foreign trade is maintaining "solid progress with its quality and efficiency both improved." The growth of general trade, accounting for nearly 60 percent of the total trade volume, indicates that the competitiveness of Chinese brands has improved, Zhao said.

However, she said while the government's efforts to stabilize foreign trade have proven effective, uncertainties remain. They include the slowdown of the economic growth of major trading partners, geopolitical risks and intensifying protectionism.

Prospects and policies

"The Chinese economy has stabilized and rebounded," Shen Jianguang, chief economist of JD Finance, a digital technology company, wrote in a recent article. Internal and external factors for economic growth have improved and the government's supportive policies have begun to bear fruit. However, he warned that the economic fundamentals have not yet fully stabilized.

As China's economy picks up, the choice of policies remains particularly critical in stabilizing growth, Shen said. It is not enough to rely only on short-term stimulus policies. He said further tax and fee reductions, accelerated urbanization, reform of the fiscal and taxation system and a new round of opening up will boost the economy.

In addition to infrastructure projects, Xu said there is still great potential in manufacturing investment. The growth of the manufacturing industry has been slow, so it is important to increase investment and strengthen policy support for industrial transformation and upgrading, cultivating new growth momentum and innovation in technology.

It is also important to deepen financial reform and propel financial innovation while keeping risks within controllable limits. According to Xu, as China opens the financial sector wider, it is more exposed to external uncertainties. Besides, banking institutions should be alert to risks in supporting infrastructure construction, small and micro business financing and private enterprise development to prevent new bad debts. It is crucial to prevent excessive stock market and foreign exchange market fluctuations as the stability of the financial market is of great importance to maintain investors' confidence.

There is great potential in financial innovation such as fintech and asset securitization, which will enhance the efficiency of financial services in the real economy, Xu said.

Copyedited by Sudeshna Sarkar

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