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Bloomberg Businessweek
Off to a Good Start
By Zhou Xiaoyan 
Tourists spend Spring Festival holiday at a historical site in Fuzhou, Fujian Province, on February 21 (XINHUA)

The Chinese economy expanded 6.8 percent in the first three months of this year on robust domestic consumption and a strong service sector, laying a sound foundation for sustained, healthy growth for all of 2018, according to the National Bureau of Statistics (NBS).

"The growth rate has been within the 6.7- to 6.9-percent range for 11 consecutive quarters, with a stable job market and inflation rate," Xing Zhihong, an NBS spokesperson, said at a press briefing on April 17.

However, uncertainties in the global market, such as mounting trade protectionism and the spillover effect of possible monetary policy changes of other major economies, are casting a shadow over the world's second-largest economy.

Good signs

Economic indicators for the first quarter demonstrated once again that China has shifted from exports- and investment-driven expansion to consumption-led growth. In the first quarter, consumption contributed 77.8 percent to economic growth, 46.5 percentage points higher than investment.

The integration of online and offline sales campaigns has not only boosted online sales volume, but also lifted sales of brick-and-mortar outlets.

Retail sales growth quickened to a higher-than-expected 10.1 percent in March. In total for the first quarter, overall retail sales grew 9.8 percent, as online retail sales surged 35.4 percent and the business volume of the courier sector increased over 30 percent as a result of the e-commerce boom.

Regarding China's first-quarter data, Japanese investment bank Nomura noted that the "bright spot" was retail sales. "This is a good sign that growth is rebalancing from investment to consumption," Nomura said in a research note. "Indeed, underneath the very stable GDP growth over the past five quarters has been a continued rapid rebalancing from old economy industrial sectors and investment, toward new economy sectors like tech and service, as well as consumption."

China's restructuring efforts are paying off, with the economic structure significantly improved. The service sector is taking the lead as the country makes headway in steering its economy toward high-quality growth and away from inefficient investment, low-end exports and polluting factories.

The service sector has been China's strongest after surpassing the industrial sector in 2012. Service industries accounted for 56.6 percent of the economy and 61.6 percent of its growth in the first quarter, NBS data shows.

The industrial sector is also climbing up the value chain and marching toward medium- and high-end production. Hi-tech and equipment manufacturing segments accounted for 12.7 percent and 32.2 percent, respectively, of total industrial output.

According to Xing, innovation-driven growth gained more momentum, with around 14,700 new companies, on average, founded daily. New industries and new business models are thriving. Output for strategic new industries increased 9.6 percent in the first quarter, much higher than overall growth.

"The Internet Plus strategy has been integrated into all sectors, giving birth to new business models and injecting fresh impetus into the broader economy," Xing said.

Looking ahead

"Investment in the service and high-end manufacturing sectors is accelerating, signaling possible industrial structural changes in the future. New types of consumption--culture, elderly care, healthcare and travel--will boom in the coming years," Xu Hongcai, Deputy Chief Economist with the China Center for International Economic Exchanges, told Beijing Review.

With the ratcheting up of China-U.S. trade friction, concerns have been mounting that it could damage the Chinese economy in the long run. But NBS spokesperson Xing said trade tensions between China and the United States cannot hinder a stable and resilient Chinese economy.

"China doesn't seek trade surplus, which has been narrowing in recent years. Our goal is more balanced trade, which is good for China's economic growth. An increase in Chinese exports is the result of the competitiveness of Chinese products," he said.

According to NBS data, domestic demand contributed 105.7 percent to China's GDP growth, on average, from 2008 to 2017. It has been the primary driving force of economic growth for the past five years, playing a vital role in helping China cushion the impact of external shocks. Compared with exports and investment, consumption has less fluctuation; therefore the changes in economic structure will help increase the stability of the Chinese economy.

According to Xing, after years of supply-side structural reform and an accelerating shift to an innovation-driven economy, China has gained a great deal of internal growth momentum so that its economy is resilient enough to make adjustments based on external changes.

The spokesperson said China's increasingly domestic consumption-led growth, expanding innovative edge and ample room for policy adjustments make the country "fully capable" of handling trade friction with the United States.

Challenges

Xu, however, warned that China should not underestimate the negative impact of external factors on its economy, especially during the next three months.

"The U.S. Federal Reserve is likely to increase its benchmark interest rates again in June. Combined with the possible escalation of China-U.S. trade tensions, it could deal a blow to Chinese exports, cross-border capital flow and domestic industries," Xu said.

He added that further tax reductions by the U.S. government could possibly undermine the competitiveness of China's manufacturing industry, as international capital and imported production and technological capacities are likely to flow back to the United States following enactment of preferential tax policies.

"To cope with these challenges, China should continue to advance innovation-driven growth and supply-side structural reform," Xu suggested. "New measures of reform and opening up should be implemented as soon as possible, unleashing more reform dividends." 

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