On Friday, China’s National Bureau of Statistics reported that its gross domestic product grew by a record 18.3% in the first quarter of 2021 in comparison to the same period last year. The figure indicates that China’s economy is roaring back to pre-pandemic levels, marking China’s highest annual growth rate since it first began recording the statistic in 1993.
At the same time, China’s growth fell two ticks below Bloomberg’s analyst consensus estimate of 18.5% growth, and below Reuters’ consensus estimate of 19%. And when China’s first quarter was compared to the fourth quarter of 2020, China’s economic numbers showed even more signs of sluggishness.
China’s economy grew 0.6% in the first quarter of 2021 compared to the final quarter of 2020, below Bloomberg’s analyst growth forecast of 1.4% and the 2.6% growth between the third and fourth quarters of 2020.
A spate of recent data suggests the economic benefits China won by moving quickly to contain COVID-19 and keep its factories open may now be wearing off. What’s more, Chinese consumers may not be spending enough to power a broad recovery.
Factories losing steam
The total value of China’s exports rose by a staggering 38.7% in the first quarter of 2021 compared to the same quarter of 2020, according to China’s data. The enormous jump reflects the fact that China shuttered its factories and locked down large portions of the country because of COVID-19 early last year, resulting in a poor first quarter.
China’s export sector boomed while other countries suffered from the ravages of the pandemic, helping China to become the only major economy to achieve growth in 2020.
China’s economy emerged from the pandemic months before other global economies in the late spring of 2020, and China became a manufacturing hub for personal protective equipment like masks and work-from-home gear like notebook computers that the rest of the world needed.
Exports to the U.S. and Europe surged. China’s trade surplus with the U.S. grew to near-record levels late last year. And the European Union’s statistic agency Eurostat reported that China was the only country to increase its exports to the EU in 2020, helping China overtake the U.S. for the first time to become Europe’s largest trading partner.
Bo Zhuang, chief China economist at TS Lombard in Singapore, warns that China’s eye-catching export figure in the first quart of this year belies underlying weakness.
Zhuang pointed to TS Lombard’s calculation that China’s exports grew 13.5% in Q1 compared to the same quarter two years ago. During January and February of this year, China’s exports grew 15.3% overall versus the same period in 2019, but fell to 10.1% growth in March, indicating that China’s export activity is beginning to taper off.
“Exports and industrial production have slowed down from very high levels,” he says. “The previous production-led, or export-led growth is running out of steam.”
Waning export growth may be even more pronounced in China’s next quarterly figures, as other nations continue to roll out vaccines and reopen their economies.
“China may face severe competition in exports and China’s trading partners may have to change” because of changing circumstances of the pandemic, says Bruce Pang, head of research at the China Renaissance investment bank in Hong Kong. “In the next quarter, China may not be supported by the strong export data anymore.”
While China’s export boom shows signs of slowing, the pace of China’s domestic consumption recovery may be picking up.
In the first quarter of 2021, total retail sales jumped 33.9% in comparison to the same period last year. They grew 1.86% quarter over quarter.
Still, Zhuang says that while domestic consumption has increased, it may not be enough to offset China’s weakening industrial figures.
“Domestic consumption is not overall strong enough to actually take up the slack,” he says.
Pang says income growth and spending in urban areas are “still lagging” compared to China’s rural areas. The GDP report shows that rural areas have enjoyed the fruits of China’s economic recovery more than its urban citizens.
Urban incomes grew 12.2% year on year to 13,120 RMB in the first quarter in China, compared to a 16.3% growth to 5,398 RMB among rural residents.
“Urban residents are still quite cautious and hesitate to spend more,” says Pang. “The economic outlook is still clouded with uncertainties.”
Unlike the U.S., China has not doled out generous stimulus checks—at least not to the same degree—to its citizens in order to boost domestic consumption. The result is that China’s recovery has been powered by factories and blue-collar workers who have been more likely to find work in rural areas.
“Most of [China’s economic] rebound only happened to the blue-collar workers,” Zhuang says. “If you are in a working factory, your wage has not been affected very much because of the export industrial production booms.”
Overall, analysts believe that China’s first quarter provides a strong indication that it is set to grow beyond its own 2021 target of 6%.
Oxford Economics writes in a note to Fortune that it is maintaining its 8.9% growth estimate for China’s economy this year.
“We expect robust economic growth to resume after the temporary weakness in the first quarter and are optimistic about exports and manufacturing investment,” Oxford Economics writes.
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