China's economy is finally showing bright spots. Worrying signs remain.

Tanner Brown

First-quarter data demonstrate health in vital areas, but observers have learned it's going to take more than a few months of robust numbers to prove a rebound is definitively under way

Even Chinese officials are wary about their economy's overall positive numbers over the last week.

"The foundation for economic stability and improvement is not yet solid," Sheng Laiyun, a spokesperson for the statistics bureau, said at a press conference in Beijing, accompanied by data released on Tuesday.

China's economy has been struggling for so long - since the pandemic ended - that signs of a turnaround are viewed with as much suspicion as hope.

In December 2022, China finally lifted the draconian "zero-COVID" rules put in place at the coronavirus pandemic's outset, and observers immediately began predicting a robust return to economic growth that would be the envy of the world.

Eighteen months on, that rebound has yet to materialize. At some point along the way, even the optimists lost faith.

Enter recent data that was among its best since the pandemic era. Gross domestic product grew 5.3% in the first quarter of the year, the data showed, accelerating slightly from the previous three months and beating estimates.

But much of the bounce came in the first two months of the year, and growth has already started to lag in crucial areas.

Measurements of the economy's key sectors showed why the bump is already fading.

Toward the end of the quarter, in March, growth in retail sales weakened and industrial output disappointed, both missing forecasts. Not only does this show that crucial parts of the economy remain weak, but it includes areas that Chinese leaders have long wanted to transition toward for healthy future growth, such as domestic consumption.

Moderate overseas demand is keeping China's manufacturing afloat, but factory prices have besmirched this bright spot. Prices have been in decline for more than a year, and Tuesday's numbers showed that the economy is falling further into deflation.

China's deflation reflects weak domestic demand but also fuels it. That's one reason buyers have kept their pocketbooks closed in an economy that simply cannot kickstart domestic consumption.

However, the main driver of low domestic spending remains weak consumer confidence. More than a year after the end of the pandemic and Chinese buyers still feel that the economy and their jobs are insecure. A big part of this is the now four-year-old decline of the property sector.

New-home prices in China fell at their fastest clip in more than eight years in March as the debt distress faced by major property developers continued to crimp demand.

China's property sector accounts for roughly a quarter of the economy, and it has been the biggest drag on the economy since a liquidity squeeze and falling prices began in 2001.

New-home prices in March were down 2.2% from a year earlier - the biggest fall since August 2015, and worse than February's 1.4% fall - according to NBS data.

Not only does the real-estate industry account for a massive portion of GDP, but it's where most Chinese - 70%, by some estimates - store their savings. With the falling values of people's properties, they are even less likely to spend.

"If housing prices and pensions keep shrinking, I wonder what kind of security I will have in my 70s," said 58-year-old Zhong Weiyi, who owns an auto dealership just outside the sprawling western city of Chengdu, China.

Also ever-present is job security - particularly among younger Chinese, for whom the unemployment rate is near 20%, and employers have enormous leverage to fire and rehire from a large pool of fresh applicants.

Multiple freelancers told MarketWatch they have significantly less work than in the past.

"For myself and most of my friends in this area, we just aren't as busy as we were before the pandemic," Xiao Gai, a 32-year-old art director from the western metropolis of Chongqing, said in a telephone interview.

Asked if factors like the explosion of AI tools might account for her reduction in client requests, Xiao said: "Everyone's using AI to some degree. But it's more about lower budgets among clients I've talked to, which results in smaller projects for us."

Next month's data will show if the early-year bright spots were blips. Until then, all everyone can do is wait.

Tanner Brown covers China for MarketWatch and Barron's.

More Tanner Brown dispatches:

China's economy is slowing. But its old-age market is booming.

Is this the new normal Xi Jinping promised the Chinese people? Yes and no.

Frosty relations between Washington and Beijing have had a chilling effect on U.S. businesses in China

China prognostication is challenging. Witness 2023. And 2024 warning signs are flashing.

-Tanner Brown

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04-23-24 0802ET

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