China’s Strong Quarter Hides Weakness, says Moody's Analytics

China's economy defied expectations in the first quarter of 2024, rebounding with a strong 5.3% year-on-year GDP growth. However, a Moody's Analytics report published on Thursday warns that vulnerabilities lurk beneath the headline growth figure.

The report highlights a concerning imbalance. While manufacturing is booming – evidenced by a 6.1% increase in industrial production and a surge of 9.9% in fixed-asset investment – consumer spending remains sluggish. Retail sales grew by 4.7% in the first quarter, with an even weaker performance in March (only 3.1% growth). This suggests households are hesitant to spend, despite the overall economic improvement.

China's success in manufacturing is largely driven by their focus on "new three" industries: electric vehicles, solar panels, and batteries. The government's heavy investment in these strategic sectors is paying off, with production and exports – especially for electric vehicles – experiencing significant growth.

However, this dominance isn't without challenges. The US and EU have raised concerns about potential trade friction, worried about China's growing clout in these strategic sectors. Just last week, US Treasury Secretary Janet Yellen visited China to discuss these concerns, specifically regarding potential overproduction of Chinese electric vehicles.

"Without households coming to the party," the report cautions, "the economy is vulnerable to external shocks."

China's latest GDP growth puts them on track for their yearly target, the report concludes, but medium-term growth prospects will depend upon the country's ability to diversifying the economy’s growth drivers.