Overview
China’s first-quarter real GDP growth rate - 5.3 per cent - was better than expected and exceeded the government’s annual target of “around 5 per cent”. But if we compare it with nominal growth, the outlook is not quite as rosy.
The GDP deflator[1] fell by 1.3 per cent in the first three months of 2024. The gauge - a measure of domestic inflationary impulse - has been in contraction for four consecutive quarters. That suggests the longest streak of deflation since the Asian financial crisis in the late 1990s.
This week’s Chart Room shows deflation pressure is most severe in property, where prices dropped by 4.3 per cent in the first quarter. The sector is still struggling to stabilise even after various piecemeal stimulus measures rolled out by Beijing in the past year. The housing slump has a knock-on effect for the industrial sector, where prices declined by 2.9 per cent. And in a country where property accounts for a big portion of household assets, its impact on consumer confidence is pronounced. Deflation is bad for the economy because it adds further pressure on spending and makes debts harder to repay.
There are reasons to be hopeful, however. Since China’s leaders on April 30 pledged to “study policies for reducing existing housing stock”, a series of measures have been rolled out to revive demand and reduce housing inventory. Hangzhou and Xi’an, big second-tier cities, scrapped all home purchase restrictions. The government also rolled out a policy stimulus package, including easing mortgage rules and urging local government to buy up unsold homes. Yes, China’s economy is in a long-term transition from a growth model that relied on property and investment to a consumption-led growth - but in the short term, a stabilisation in the housing market will help the economy recover. We expect further loosening measures to come. It will take time to see whether they can fix the long-running property downturn, but supportive policies in the coming months may bring the economy back to mild inflation.
[1] According to Fidelity’s calculation based on figures released by China’s National Bureau of Statistics. The GDP deflator is calculated by dividing the nominal GDP by the real GDP and multiplying the result by 100. China doesn’t publish official GDP deflator numbers.
