Stronger policy key to stable economy amid COVID-19

Despite the impact of the COVID-19 pandemic, the Chinese economy registered moderate growth in the first quarter. We believe that stronger policy support will be rolled out in the second quarter to realize steady growth.

Figures from the National Bureau of Statistics showed that for the first quarter, China's gross domestic product rose 4.8 percent compared with the same period a year earlier. On a quarter-on-quarter basis, the GDP grew 1.3 percent. This indicates that for the first quarter, the momentum of domestic growth has generally weakened amid rising complexities and uncertainties at home and abroad.

Specifically, real estate investment and consumption were the two major sectors weighing on growth in the first quarter. NBS figures showed that the overall first-quarter sales area of residential housing in China fell 13.8 percent year-on-year, with total sales volume declining by 22.7 percent. We believe expectations of rising property prices are weakening, while uncertainty in household incomes has hampered potential homebuyers' willingness to buy property, and these contributed to the weakening property sales. The softening demand led to weaker property investment. Real estate investment grew by a mere 0.7 percent in the first quarter compared with a 3.7 percent yearly growth in the fourth quarter last year.

In addition, the lingering COVID-19 situation has hampered residents' willingness to ponder home buying. This is particularly reflected in housing sales in first-tier cities, as both Shenzhen, Guangdong province, and Shanghai have been affected by the current round of COVID-19 resurgences. As real estate sales decline, funding for developers encounters pressure. At the same time, growth in home loans is also dropping.

This year, there have been multiple policy signals pointing to more funding support for real estate developers, yet our reading from figures shows that it is still difficult for real estate businesses to get loans from banks. Against such a backdrop, real estate enterprises are still suffering from a liquidity crunch. And the lack of funding for real estate developers means that going forward, real estate investment will still face downward pressure.

Consumption also shows signs of slackening. With the COVID-19 situation still evolving, uncertainty over household incomes has risen, and people are displaying little willingness to spend. Limited offline buying activity also contributes to weakened consumption. NBS figures show that China's retail sales of consumer goods rose 3.3 percent year-on-year in the first quarter. In March, retail sales decreased by 3.5 percent year-on-year.

Specifically, direct shocks to consumption were revealed via weakening offline consumption. Worries about possible COVID-19 outbreak scenarios and stringent COVID-19 containment measures pushed many to curtail offline travel and consumption. This was revealed by NBS figures that showed catering revenue came in at 293.5 billion yuan ($45.14 billion) in the first quarter, down 16.4 percent year-on-year. In addition, reduced offline outings also curtailed people's spending on social activities. It is notable that spending on clothing and cosmetics went down.

Despite such short-term direct impacts, more attention should be focused on the mid- and long-term impacts on consumer behavior caused by the pandemic. The COVID-19 impact has led to a mere 6.3 percent growth in household income in the first quarter, lower than the overall level last year. Also, as many smaller businesses have been pinched by the pandemic, salary growth has also slowed down in the January-March period.

Despite the above weaker sectors, growth in the first quarter mainly came from the following three sectors.

First was the overall high growth of investment in manufacturing. Benefiting from favorable investment policies and robust export growth, investment in manufacturing continued to recover in the first quarter with an annual growth of 15.6 percent. We also attribute the high growth of manufacturing investment to factors like the government's strong willingness to keep growth stable. Recent State Council executive meetings have urged bringing the role of government bonds into full play to energize investment, and called for an early issuance and allocation of local government special bonds to drive growth.

Second are exports. Impacted by price rises and surging demand from overseas, exports grew robustly in the first quarter, registering 13.4 percent growth year-on-year.

Third is investment in infrastructure. With this year's fiscal policies being front-loaded and working proactively, infrastructure has become a key driver for growth, and infrastructure investment grew by 8.5 percent year-on-year.

Boosted by manufacturing and infrastructure, fixed asset investment grew 9.3 percent year-on-year in the first quarter, notably faster than overall GDP growth, thus becoming a key underpinning for growth.

In summary, we believe that the COVID-19 situation has become the biggest uncertainty for the economy and adds further pressure to a tough situation. Impacted by the changing COVID-19 situation, economic indicators slumped in March compared with the first two months. This also means that when attempting to provide visibility for the economic outlook in April as well as for the second quarter, we need to fully consider the economic impact of COVID-19. The real estate sector has continued to drag on growth, as people's homebuying willingness weakens.

Manufacturing investment grew at a fast pace and has underpinned growth in the first quarter, yet it should be noted that exports may face downward pressure. Manufacturers and smaller businesses require stronger policy support. In addition, infrastructure investment demonstrates robust growth with the help of front-loaded policies, and such momentum is likely to continue.

Going forward, we expect stronger policy support in the second quarter as the recent State Council's executive meeting urged the need to keep growth stable. We expect in particular that fiscal policies will continue to work in advance to generate economic activity to support growth, and more measures boosting consumption will be put in place.

The writer is the head and chief economist of Shanghai-listed Hongta Securities.

The views don't necessarily reflect those of China Daily.