China’s Q1 2024 GDP growth was 5.3% year-on-year, beating the 4.8% consensus forecast. However, economic data also confirms that Chinese economic growth remains unbalanced.

China’s Q1 numbers might be seen as an indication that the Chinese economy has turned a corner. However, the economy still looks unbalanced with a strong manufacturing set against weak domestic demand (especially in real estate).

Fixed assets investment rose 4.5% year-on-year in Q1, exceeding forecasts, as illustrated by the stronger March PMI of 50.8. Manufacturing and factory building have been the key economic drivers in Q1 along with strong exports, which posted 7.1% y-o-y growth in the January-February period, although dropping by 7.5% y-o-y in March (partly due to a high post-COVID base).

Contrasting with the strong manufacturing activity, domestic demand remains weak. March retail sales rose only 3.1% y-o-y and Q1 residential property sales dropped 30.7% y-o-y. 

Project Blue believes that ‘strong manufacturing’ coupled with ‘weak domestic demand’ will be a feature of the coming quarters. Green energy, decarbonisation, defence, ‘qualitative’ infrastructure, aerospace, and high tech will remain the growth drivers, while domestic demand along with the property market will remain subdued although some stabilisation could take place in the year.

Based on the current data, we believe that the Chinese government's GDP growth target of ‘around 5%’ is achievable. We expect that changes in China’s economic policy will be more about fine-tuning than making any drastic changes. One of the main risks is on the export side, as trade flows can be easily disrupted by changes in the global macro environment and/or geopolitics.

The big picture is that China’s economy is shifting from an ‘old growth’ model, based on heavy infrastructure spending, such as roads, ports and airports as well as real estate, to a ‘new growth’ model, based on sectors which have been prioritised by the Chinese government, i.e. green energy, automotive, aerospace and defence.

The ‘old growth’ vs ‘new growth’ notion can be seen to be playing out in 2024 commodity trends at present.  

Copper, a proxy for the electrification of the new-growth economy, saw prices rise by about 15% in Q1 iron ore, tied to China’s old-growth property market, saw pieces drop by about 25%. Of course, there are also other contributing factors, primarily on the supply side, but the Chinese economy’s direction of travel is nonetheless a key driver of commodity price trends.