China's first-quarter growth was 4.8%, above the 4.2% expectation, showing an acceleration that masked a decline towards the end of March when Covid-19 quarantines were implemented in Shenzhen, Shanghai and other cities. As such, the micron epidemic and containment measures reflect a relatively strong performance before they become operational. With the ongoing pandemic and war in Europe contributing to supply delays and inflationary pressures, numerous headwinds will show that this momentum will not be like the first 2 months of the year. This performance will decrease further when the serious lockdowns in important centers, especially Shanghai, are added to the supply chain problems due to the zero Covid policy.

 

So the key to the outlook will be how resilient demand can remain in the face of these headwinds. Global services sectors are likely to be supported by a tailwind of further easing of travel restrictions, but higher prices could stifle demand. Plus, there will be an even deeper downturn for the service sector, which is bearing the brunt of containment measures in China.

 

Chinese GDP performance… Source: Bloomberg

 

Although the GDP performance is above expectations, the closures due to Covid will indicate a weakening in the economy for the next period. These data show that most of the demand growth from the pandemic opening has now subsided, pointing to weaker growth in the coming months. China has entered a steep decline amid new lockdown measures. Production is likely to have slowed in March due to the quarantine in Shenzhen and Shanghai. Growth risks have increased after the country struggled with outbreaks of the more contagious COVID-19 Omicron variant and the Russia-Ukraine war that broke out in Q1.

 

Other data, including retail sales and industrial production, which is higher-frequency and up-to-date data, is also to understand the extent to which recent movement restrictions have impacted production, especially after the Caixin China overall composite PMI showed the fastest decline in business activity since February 2020. interesting for. When we look at retail sales in March, there is a 3.5% pullback, which is above the 3% contraction expectation.

 

If we look at it in terms of PBOC; Another reduction was made in the reserve requirement ratios last week. After the uncertainties in the economy intensified in the real estate sector, after the supply chain and Covid interruptions, it took on a general view over the real sector and service. For this reason, the credit risk for banks is also higher. The PBOC will continue its downward trend in lending rates, which are references to bank loan rates. Therefore, the theoretical interest rate strategy will still take the matter from the growth perspective. The expected 50 basis point increase by the Fed in May will further widen the China-US interest gap in favor of the US. Funding is kept cheap and this is desired to accelerate credit trends.

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