VINACHEM

China's economy continued its recovery in the first two months, but challenges remain, including tariffs and insufficient demand. To sustain growth and achieve high-quality economic development, well-coordinated and effective policies are needed to boost consumption.

Since the beginning of the year, China has seen steady growth in production, supply, consumption and investment. First-quarter GDP growth is projected to reach around 5.5 percent year-on-year, despite headwinds such as fewer working days in the first two months and the earlier-than-usual arrival of the Spring Festival holiday.

The industrial added value of major enterprises rose 5.9 percent year-on-year in the first two months, 0.1 percentage point higher than the full-year 2024 growth rate. The services sector output index grew 5.6 percent, accelerating by 0.4 percentage point from last year's annual figure.

Retail sales of consumer goods increased 4 percent year-on-year, while fixed-asset investment grew 4.1 percent. These figures are 0.5 and 0.9 percentage point higher, respectively, than the full-year growth rates last year.

Goods and services consumption gained momentum, driven by expanded trade-in policies for consumer goods and an optimized Spring Festival holiday schedule. Merchandise retail grew 3.9 percent, while catering revenue increased 4.3 percent year-on-year. Compared with December, catering revenue growth accelerated by 1.6 percentage points.

Manufacturing investment surged 9 percent year-on-year in the first two months, maintaining strong momentum after a 9.2 percent annual rise in 2024. Investment in equipment and tools skyrocketed 18 percent, up 2.3 percentage points from the previous year, contributing 62.3 percent to total investment growth. Technological upgrades in manufacturing increased by 10 percent year-on-year, 2 percentage points higher than the full-year 2024 growth rate.

Infrastructure investment expanded steadily, growing by around 10 percent year-on-year in the first two months, 0.8 percentage point faster than full-year 2024.New government bond issuances increased by nearly 1.5 trillion yuan ($206 billion) compared with the same period last year, providing strong support for infrastructure projects.

China has adopted a more proactive fiscal policy this year, setting the deficit-to-GDP ratio at around 4 percent, the highest ever. The total fiscal deficit is budgeted at 5.66 trillion yuan, with 4.86 trillion yuan allocated to the central government. This represents 85.9 percent of the total, the highest share in recent years.

On the local government front, the quota for special-purpose bonds has been further raised to stabilize economic growth, promote the recovery of the property sector and boost economic circulation.

Despite policy support, challenges remain. The negative impact of US tariff hikes on Chinese goods is expected to materialize in the second quarter, posing dual pressures on exports and overall economic performance. Rising global economic risks could further weaken China's exports to non-US markets.

The property sector still faces credit risks, preventing a sustained stabilization of housing prices and real estate investment in the short term.

Supply-demand imbalances, exacerbated by insufficient effective demand and intense domestic competition, have dampened corporate profitability and household income growth.

The consumer price index declined by 0.1 percent year-on-year in the first two months and has hovered near zero since 2023. The producer price index dropped 2.2 percent year-on-year in February, marking its 29th consecutive month of declines.

For the full-year, consumption and infrastructure investment will remain key drivers of economic growth.

More proactive fiscal policies, moderately loose monetary policies and enhanced fiscal-monetary coordination are expected to reinforce consumption's role in driving the economy. Some provinces are likely to explore new investment opportunities under the local debt resolution framework.

The decline in property investment is expected to narrow as the market gradually stabilizes. The economy may face downward pressure in the second quarter, stabilize in the third quarter with policy support and maintain recovery momentum in the fourth quarter.

The authorities have acted swiftly to implement directives from the Central Economic Work Conference, driving early-year growth through front-loaded efforts and accelerated project launches. However, weak demand, subdued expectations and an unstable recovery foundation make growth vulnerable to setbacks. The negative effects of China-US trade frictions could intensify in the second quarter, adding further pressure.

Thus, policy support must remain strong until self-sustaining growth drivers strengthen and a virtuous economic cycle is established.

From a fiscal policy perspective, dynamic budget adjustments should ensure that fiscal expenditure growth matches or slightly outpaces economic growth.

Tax and fee reduction policies should focus on efficiency and quality rather than size and quantity.

Fiscal spending should strike a balance between investment and consumption, prioritizing public consumption sectors such as healthcare, education, and eldercare to reduce household financial burdens and encourage spending.

Targeted support measures — including unemployment subsidies for graduates, rural elderly subsidies and childcare allowances for families with two or more children — could further stimulate consumption.

Debt resolution strategies should optimize the use of 6 trillion yuan in debt resolution quotas within three years and 4 trillion yuan over five years, ensuring flexibility based on regional needs.

From a monetary policy perspective, targeted tools should be employed to boost household consumption and corporate investment demand. Strengthened financial support will facilitate large-scale equipment renewals and consumer goods trade-in programs.

Policy measures should stabilize the property market while mitigating credit risks for real estate companies. Unnecessary restrictions on property transactions should be removed to restore market-driven allocation of commercial housing.

Establishing a central-level property stabilization fund could help alleviate liquidity pressure on firms, enhancing local governments' ability to maintain market stability.

Encouraging the development of high-quality residential projects will help meet housing demand.

Policies should promote reforms and improvements in mechanisms to boost consumption by increasing the ability and willingness of households to spend.

Tailored assistance and subsidies should be provided to enhance purchasing power and ensure sustained momentum for consumer goods trade-in programs.

Income distribution reforms should optimize national income allocation by refining tax structures and accelerating rural land marketization, thereby increasing the income share of low and middle-income households.

Household registration reforms should facilitate the integration of rural migrant workers into urban residency systems — known as the hukou system — stabilizing long-term expectations and increasing their spending appetites.

On the supply side, efforts should focus on optimizing the supply structure by increasing the share of high-end manufacturing to meet high-quality demand.

Liberalizing market access in the services sector could unlock demand for services consumption by easing entry barriers in tourism, culture, healthcare and eldercare, supported by stronger standardization and oversight.  – Source: China Daily –