China | Chinese economy has rebounded with deflationary caution in the post-Covid era

Summary

The Chinese economy rebounded significantly in Q1 with 4.5% higher-than-expected growth. However, we need to pay attention to the recent deflationary pressure amid economic recovery.

Key points

• Key points:
• China’s Q1 2023 GDP growth reached 4.5% y/y, higher than the market consensus at 4% and our BBVA forecast at 3.2%, suggesting a higher-than-expected economic recovery in Q1 after lifting the “zero Covid” policy in December.
• March economic activities data broadly improved as well, among which, industrial production and retail sales are significantly stronger than the previous readings, although fixed asset investment has marginally moderated. due to sluggish housing investment.
• However, some caveats are noteworthy; chief among which is that China is entering an “atypical” deflation cycle, which means deflation amid economic recovery.
• The transmission mechanism from expansionary monetary and fiscal measures to private investment and consumption is still not satisfactory. Credit goes directly to SOEs and the replacement of maturing local government bonds, but not to private investment and consumption.
• The recovery calls for more policy support at the central government level to help alleviate “balance sheet recession” of households and enterprises. We maintain 5.2% GDP growth in 2023.

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