China's soaring economic activity masks uneven recovery

The official data released Monday show unprecedented growth rates of more than 30% for key indicators, largely due to distortions when compared to last year's shutdowns. Industrial production growth of 35.1% beat economist's expectations of 32.2%, reflecting a shorter Lunar New Year holiday this year as the government encouraged workers to remain in factories rather than return to their hometowns.

Combined with strong export data for January and February, the statistics show that China has largely continued the pattern established last year of a recovery based on growth of industrial production for export and investment in sectors such as real estate, delaying Beijing's efforts to re-balance the economy toward domestic consumer demand.

Retail sales reported by China's statistics bureau climbed 33.8% in the period, beating a forecast of 32% in a Bloomberg poll of economists. On a two-year average basis, which corrects for the huge drop seen last year as China introduced pandemic restrictions, retail sales growth was 3.2%, a sharp contrast with 8.1% growth in industrial output over the same period.

Retail sales in February rose only 0.56% from the previous month, the data showed. This indicates that "the Lunar New Year may have had a weaker boost to national consumption than expected," according to Bruce Pang, an economist at China Renaissance Securities.

The central bank kept market liquidity neutral earlier Monday, prompting money market rates to rise on persistent concerns about liquidity.

The central bank's action "just offset maturity, indicating the People's Bank of China's tightening intention," said Xing Zhaopeng, an economist at Australia & New Zealand Banking Group. "Since the start of this year, PBOC has net drained over 600 billion yuan in funds from the market in order to curb asset bubbles."

The government imposed travel restrictions before the new year holidays, which fell in February this year, to curb sporadic virus cases in some parts of the country. That helped to boost industrial output, with factories able to remain open or resume production earlier than usual to meet soaring export demand. But it also suppressed spending on travel, restaurants and leisure activities.

Fixed-asset investment rose 35%, well below a projection of 40.9%. Since real estate has been the biggest driver of investment growth over the past year, that likely reflects Beijing tightening financing for property developers. Economists expect investment by manufacturers will strengthen in 2021 following a recovery in their profits. However, the lower-than-expected investment figures showed manufacturers are still cautious, Pang added.

"Domestically, the unbalanced recovery is still notable and the foundation for the economic recovery is not solid yet," Liu Aihua, a spokeswoman for China's statistics bureau said in a statement. The urban unemployment rate of 5.5% in February remained above pre-pandemic levels, with the rate among younger people particularly high.

"The retail sales and industrial consumption figures were widely above estimates and shows there is resilience in the economy," said William Ping, managing director at Peaceful Investment in Shenzhen. "Currently the closest thing to a worry of mine is whether the nation will put enough emphasis on domestic consumption in the long run," he added.

China is still the only major economy to have powered out of the pandemic after early control over the virus and then surging global demand for medical goods and work-from-home devices. The economy grew 2.3% in 2020 and is forecast by economists to expand 8.4% this year.

The government is targeting more modest growth of "above 6%" in 2021, allowing officials to focus on longer-term challenges such as technological upgrading and curbing risk in the financial system. Beijing has signaled it wants to scale back its pandemic stimulus, with analysts predicting a gradual reduction in monetary and fiscal support.