Retail sales grew 6.7% year over year in the first two months of 2022, according to data released Tuesday by the National Bureau of Statistics (NBS). That was well above the estimated 3% increase in a Reuters poll of economists.
Industrial production rose by 7.5% over the same period, beating the forecast of 3.9%. And investments in property, plant and equipment such as infrastructure and machinery increased by 12.2% year-on-year.
“Under the combined effect of macro policies and corporate efforts, the momentum of China’s economic recovery improved in January and February, laying a solid foundation for a good start in the first quarter of this year,” said Fu Linghui, a spokesman for NBS , at a press conference in Beijing on Tuesday.
On the political front China has significantly increased its spending on infrastructure as many local governments embark on large-scale projects in areas such as electromobility and semiconductors, Fu added.
Data on Tuesday showed that investment in manufacturing grew 21% yoy in January and February, much faster than the 13.5% yoy growth recorded over the same period in 2021.
This is not the first time this year that Chinese authorities have underscored the importance of infrastructure spending. Earlier this month, Chinese Premier Li Keqiang said the government will increase fiscal and monetary support for the economy this year, including spend more on infrastructure and cut interest rates more.
The government has widened the general budget deficit this year, implying growth in infrastructure investment, Larry Hu, chief economist for Greater China at Macquarie Group, wrote in a report on Tuesday.
However, experts warn that several challenges are on the horizon, including Covid and the war in Ukraine.
The worst Covid-19 surge in two years
China is battling its worst Covid surge since the original outbreak in Wuhan in early 2020.
“As officials abandon targeted containment measures in favor of wholesale lockdowns, this has the potential to be even more disruptive than last summer’s delta wave, which led to a sharp contraction in economic output,” wrote Julian Evans-Pritchard, senior China economist on capital economics , on Tuesday.
Even the government admits that new Covid outbreaks could weigh on the economy in the coming months.
“The recent spread of the coronavirus in many parts of the country may further curb consumption, and the foundation of consumption is still not strong,” Fu said. “Sporadic outbreaks in some regions will also impact industrial growth.”
China reported 5,154 locally transmitted cases Monday, the highest number in two years, according to the National Health Commission (NHC).
To curb the spread of the virus, authorities in several cities have taken strict measures and imposed various forms of lockdowns on tens of millions of people.
The southern city of Shenzhen, which borders Hong Kong, has been in a week-long lockdown since Monday. All businesses – except those deemed essential or involved in supplying Hong Kong – have suspended operations or implemented work-from-home policies. The city is home to Chinese tech giants Huawei and Tencent.
Aside from Shenzhen, local authorities in the northeastern province of Jilin have banned residents from leaving or traveling since Monday. The province of 24 million people is home to the industrial center of Changchun, where Toyota (TM) and Volkswagen (VLKAF) operate their car factories in partnership at the state automaker FAW Group.
Shanghai, the country’s largest business hub, has also imposed tough measures, closing schools and cinemas and restricting travel to the city, following a spike in Covid cases.
“Indeed, the biggest uncertainty this year is Covid-19,” said Hu of Macquarie Group.
He forecasts China to grow 4% in the US current Quarter. For 2022, he expects the world’s second largest economy to grow by 5%, below the government’s target.
Earlier this month, Premier Li set China’s economic growth target at around 5.5% for 2022, the lowest official target in decades.
Inflationary pressures from the Ukraine crisis
China’s growth could be further impacted by the war in Ukraine.
Russia’s invasion of its neighbor is driving up commodity prices and unnerving the global economy, while policymakers are already struggling to bring high inflation under control.
NBS’s Fu said the direct impact of tensions in Europe on China was “limited”. as its trade exposure to Russia and Ukraine is “small”.
But he said the impact on global commodity prices is “obvious”, which could increase the pressure of “imported inflation” on China.
Several food and beverage companies in China have recently hiked the prices of their products, including dairy giants Yili and Mengniu.
“The recent acceleration in commodity prices in the wake of the Russia-Ukraine conflict has increased margin pressures on packaged food companies,” Morningstar analysts said in a report Tuesday. “Various food and beverage companies in China have been raising prices to mitigate margin compression since the third quarter of last year.”
China and Russia have forged close ties in recent years, signing a series of commodity deals during Russian President Putin’s visit to Beijing last month. But Russia’s invasion of Ukraine has tested their friendship.
Beijing hasn’t rushed to help Russia after its economy was hit by sanctions from around the world. The complicated messages from Beijing suggest the Chinese leadership is walking “a very difficult balancing act” on Ukraine, analysts say.
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