China is a tale of at least two economies

Beyond GDP. An optimist will look at China’s latest GDP figures released on Wednesday and argue they signal that the best of times is returning. The country’s economy grew 5.3% in the first quarter year-on-year, comfortably beating analysts’ expectations of a 4.6% increase and putting Beijing on track to hit its 5% target for 2024. Yet beneath the headline number lies evidence that the People’s Republic has yet to put worse times behind it, not least near-zero inflation and sluggish lending and an enduring property market crisis. It’s a tale of at least two economies.

Some sectors had a robust start to the year. Manufacturing grew 6.1%, with President Xi Jinping’s push to develop “new quality productive forces” paying off for electric-vehicle chargers and 3D printing, which both grew more than 40% during the period. Catering, meanwhile, jumped by more than a tenth, a sign that domestic travel and entertainment is rebounding.

Sprouting green shoots like these explain why Goldman Sachs and Morgan Stanley both recently lifted their 2024 growth forecast for China. Neither investment bank expects that to last, though, as the country struggles with some deep-seated challenges like real estate. Property investment in the first three months of the year slid another 9.5% from a year earlier, while property sales by floor area logged a 19.4% drop, suggesting that policymakers have yet to revive confidence in a sector that used to account for one quarter of China’s economy.

Recent economic indicators have pointed to a rockier time ahead. Consumer inflation cooled more than expected in March and hovers around negative territory. An increase in monetary supply has also failed to translate into more bank lending. Fitch last week followed Moody’s by downgrading its outlook on China’s sovereign credit rating.

When meeting a group of U.S. business leaders last month, Xi said his administration is planning “a series of major steps” to propel China’s economy forward and that the Peak China theory will not be proved right. The remark has instilled expectations that the People’s Republic is serious about a new round of economic reforms. Such a diverse and often conflicting set of data, though, is complicating Beijing’s search for effective stimulus.