New structural trends emerging from China

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China grew at 4.5% in Q1 while expectations were 4%. It was under the spotlight as the economy is resuming after Covid lockdowns. Retail sales increased 10.6% in March, consumer spending is also on an upward trend.

But industrial production growth came in at 3.9% in March. Fixed asset investments disappointed as they increased by 5.1% in Q1 of 2023. Even manufacturing PMI is hovering around 50 or below it since quite some time. Weak external demand can be the reason behind all this.

Let’s look at the big picture. China is not facing the problems persistent in the west. Inflation is in control, it has fallen below 1% and banking stress has not reached the coast of dragon.

Until a few years back China did not display global political ambitions and just acted as a manufacturing hub. Design, research and development prevailed in western countries while China manufactured products cheaply and then exported them. China used this to catch up with best technology and production process in world,

Now, the tide seems to be turning. China is focusing a lot on the domestic economy, it may provide further stimulus for domestic consumption and infrastructure. However, it needs to focus on resolving real estate situation and promote its domestic companies as global companies are exiting the country. It has already caught up with best technologies in the world.

So, from here on, if China wants to grow at a rapid pace, its domestic companies need to be at the frontier and even raise the technology frontier further. It is spending a lot on technology like 5G but companies also need the freedom to research freely. Now that can be challenging as it may increase the power of companies which can pose threat to the authoritarian regime.

At the same time, 2 structural trends are energing. 1st one has implications for Europe. Europe is becoming hot zone where China is trying to increase its influence and reduce that of US. This will be interesting as China is supporting Russia and there are issues like semiconductor ban, Taiwan issues. So let’s see how Europe supports China.

Also, China is increasing its influence in oil politics. It has brokered a deal between Saudi-Iran and is ally of Russia. All these are major players in oil market. So don’t be surprised if we witness China influencing OPEC+ decisions.