Q&A: China's first-quarter GDP

On Wednesday morning China's State Statistical Bureau will release one of the most eagerly awaited numbers in modern macroeconomics - the first-quarter growth figure for what is, by one measure, already the world's largest economy.

The scramble for this data point is such that on March 5 three wire reporters showed up at the Great Hall of the People by 2:30am for the release of the government's annual growth target - all for a few seconds jump on a number that moves markets around the world.

What details should we be watching?

One important number to watch will be net exports. Typically this has little effect on growth because China needs to buy in raw materials - oil, iron ore and the like - to churn out what it ships overseas. Gavekal Dragonomics estimates that last year a relatively modest year-on-year increase in net exports deducted 0.3 percentage points from overall growth.

But the collapse in commodity prices over the past year - in part because of slowing growth in China - has pruned Beijing's import bill, leading to record $60bn monthly trade surpluses in both January and February and a first-quarter surplus six times larger than the same period last year.

This surge in net exports will flatter China's first-quarter growth figure, making it appear domestic demand is stronger than it really is and adding to fears about deflation.

So does that mean fears about deflation in China warranted?

Not according to Chinese government officials, who argue that inflation of just 1.4 per cent - much less than their 3 per cent target - reflects falling commodity prices abroad and bumper harvests at home. Food accounts for more than a third of the country's consumer price index.

But worries clearly persist. China's central bank has cut benchmark interest rates twice over the past four months and trimmed commercial banks' reserve requirements.

In other words, the "new normal" could be slow growth plus deflation?

Possibly. Government officials are confident these measures will help maintain economic growth at its so-called "new normal" of about 7 per cent. But other economists fret about a more pessimistic scenario, in which the economy continues its slow-but-steady descent despite repeated cuts in interest rates.

The IMF, for example, predicts that China's economy will grow 6.8 per cent this year and 6.5 per cent in 2016, with the latter figure potentially lower than India's for the first time in decades.

Add in the Fed raising rates and it looks like you've got the perfect recipe for capital flight?

Right. In the past a similar scenario has prompted China to occasionally hold the renminbi at a level many economists felt meant the currency was undervalued, to the dismay of the US in particular.

For now China is more focused on supporting its currency. Through the daily trading limits and other safeguards China has constructed around its carefully managed currency, the central bank has struggled to arrest the renminbi's slide against the dollar over recent months. That, Chinese officials argue, is more reflective of the dollar's strength than any deliberate policy by Beijing.

Officials say they would rather keep the currency rate stable, creating a survival-of-the fittest environment in which only the most innovative of companies thrive, creating jobs and boosting the economy. If realised, that vision would be better than any government-directed stimulus and is ultimately the best guarantor of 7 per cent economic growth. It is, however, a big if - as testified by the scores of zombie steel mills, coal mines and shipyards.

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