China Fends Off Trade Trouble With 6.8% Growth -- Update

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04/17/2018 | 04:54 am


By Lingling Wei



BEIJING--China's economy expanded at a faster-than-expected 6.8% in the first quarter, bucking expectations for a slowdown, though flagging exports and factory output may prove a drag in the coming months.



The pace of growth matched the previous quarter's rate and confounded the predictions of some investors and analysts that the economy would slow early this year amid a government debt cleanup that has begun to crimp investment in property, infrastructure and factories. Retail sales held up particularly well, rising 9.8% in the quarter from the year-earlier period.



Unexpectedly strong exports in the first two months of the year, along with resilient domestic consumption and factory output, helped lift growth. And, so far, the simmering trade tensions between Washington and Beijing have had little impact on China, the world's second-largest economy, though some officials and economists are concerned that a prolonged trade battle could change that.



"We'll face some challenges on trade in the foreseeable future," Xing Zhihong, a spokesman at the National Bureau of Statistics, said at a press briefing Tuesday. Still, Mr. Xing said healthy domestic demand will help offset any potential drop in foreign orders. "The U.S.-China trade friction can't beat the Chinese economy," he said.



The possibility of a bruising trade battle comes as signs emerge that shipments overseas, home sales and industrial output--all cornerstones of China's economy--are starting to weaken. For instance, official data show Chinese factories are beginning to produce fewer goods for foreign markets.



That slowdown, economists say, is spurred by the anticipation of higher barriers to enter the U.S. market and by a softening of global demand after a year during which the world's major economies grew in rare harmony. Such synchronized expansions are "coming to an end," according to a new report by the Washington-based Institute of International Finance.



Washington and Beijing have been embroiled in a tit-for-tat trade spat since the Trump administration imposed new tariffs on China-made solar panels, washing machines, steel and other metals earlier this year. Both sides have threatened to impose new levies on lengthening lists of each country's goods. The rising tensions have roiled global markets and raised worries that a full-bore trade war would drag down the global economy.



"There is some impact, for sure," said Xia Aimin, a marketing executive at Longi Green Energy Tech, a large Chinese maker of solar panels. Mr. Xia said the company has managed to blunt the effect of the new U.S. tariffs by lowering production costs. The U.S. market remains "as important to us as always," he said, and Longi still aims to double its revenue from U.S. sales this year.



Meanwhile, despite the strong headline performance in the first quarter, a sustained campaign by Beijing to curb rampant borrowing is biting into big-ticket investments, especially those by local governments and state-owned companies. The northwestern region of Xinjiang this month halted all government-funded industrial and infrastructure construction begun since January 2017, as officials launched an investigation into whether those projects have sufficient financing.



"We would rather have a slower rate of growth than more debts," said a notice issued by the region's economic-planning agency.



Such efforts, together with the anticipation of greater headwinds overseas, have led many economists and investors to forecast some deceleration in economic expansion during the rest of the year. A marked slowdown, they said, could weaken the leadership's resolve to sustain the debt cleanup and an initiative to close unneeded smokestack factories--efforts that squeeze near-term growth.



"There must be a balance between controlling risks and maintaining growth," said Zhu Baoliang, chief economist at the State Information Center, a think tank affiliated with the country's top economic-planning agency. To spur growth, Mr. Zhu said, Beijing should lower reserve requirements for banks to unleash more funds for loans.



Economists and China analysts expect a switch in tack by the government should growth dip below 6.5%, the target the country's leadership set for this year. A number of indicators for March--from exports and industrial output to fixed-asset investment--showed weakening momentum for expansion in the coming months.



China's trade surplus with the U.S. continued to widen in the first quarter. But overseas shipments dropped last month, causing China to record a rare trade deficit with the rest of the world. Meanwhile, industrial production grew just 6% in March, compared with 7.2% in the first two months of the year, and 6.8% overall for the quarter. Investment in buildings, factories and other fixed assets grew 7.5% in the first quarter, below the 7.7% expected by economists polled by The Wall Street Journal.



Government efforts to prevent speculative home buying--and cool a torrid housing market--also are starting to hit residential sales, which slowed to 11.4% in the first quarter, from 15.7% in the first two months of 2018.



Grace Zhu, Liyan Qi and Lin Zhu contributed to this article.



Write to Lingling Wei at lingling.wei@wsj.com





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