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Although China’s growth momentum softened in Q1, it is not necessarily a sign of a deteriorating macro-environment. Because the growth in Q4 last year exceeded the pre-COVID-19 trend growth, and was probably above China’s long-term potential growth range, the current moderation signals a transition of the Chinese economy from recovery mode to pre-COVID-19 trend growth - in other words, “normalization”.
Status of COVID-19 Recovery – China’s economic data from Q1 confirms continued recovery, but decelerating growth momentum suggests that growth dynamics are shifting from recovery mode to pre-COVID-19 trend growth. Producer price inflation is likely to further intensify in the coming months before it levels off in late 2021. The monetary environment is likely to remain comparatively loose through 2021.
Investment Trends – Investment growth is slowing. Moderation is anticipated for both real estate development and infrastructure investment for the remainder of the year. Manufacturing investment growth is likely to rebound from Q1’s low level, but there are rising downside risks for manufacturing investment if corporate profitability comes under more pressure.