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China consumers vie to check slowdown as trade spat lingers

Online retail sales soar 35.4% in Q1 from a year earlier while investment in education jumps 26.9%

Beijing

CHINA'S steady first-quarter expansion masked a tug-of-war between struggling old industries from mining to textiles, and booming new-economy sectors including e-commerce and health care.

The key question: As President Xi Jinping strives to curb debt and jousts with Donald Trump over trade, how much of the potential drag can the new growth drivers offset?

For now, the new engines are taking up the slack with the economic expansion matching the 6.8 per cent pace for the last three months of 2017. Among the drivers, online retail sales soared 35.4 per cent in the first quarter from a year earlier while investment in education jumped 26.9 per cent, the statistics bureau said. Consumption contributed 77.8 per cent to the quarterly expansion, slightly up from a year earlier.

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Old engines are labouring. Industrial production missed estimates for March amid anaemic performance in segments including mining, metal products and textiles.

As consumption's contribution to growth typically surges in the first three months, Tuesday's data isn't likely to be indicative of the outlook for the rest of the year. Indeed, economists forecast a slowdown from 2017 to 6.5 per cent growth in 2018, as Mr Xi's financial risk campaign gains further traction. And if trade tensions with the US escalate, it may be asking too much of China's new economy to take up all the slack.

"The good news is that consumers are taking it all in stride, offering a welcome buffer against potential tariffs externally and policy curbs on construction locally," said Frederic Neumann, co-head of Asian economics research at HSBC Holdings Plc in Hong Kong. The not-so-good news is that "China will likely cool further in the coming months as Beijing's policy restrictions are starting to bite. Construction in particular is feeling the brunt," he said.

Trade announcements followed the GDP report. The Commerce Ministry said that temporary anti-dumping deposits will be imposed on US sorghum imports, adding to trade tensions, while the National Development and Reform Commission said foreign ownership limits for auto ventures will be removed in coming years, a boost to global companies seeking better market access. The Foreign Ministry said that Beijing is ready to start trade countermeasures.

"Economic tension between the US and China is rising," Louis Kuijs, chief Asia economist at Oxford Economics in Hong Kong and a former International Monetary Fund researcher, wrote in a note. "We worry about the long-term implications but view a trade war with substantial short-term growth impact as unlikely. Nonetheless, we continue to expect China's GDP growth to slow in the rest of the year because of tighter monetary financial policies."

A supplemental report on Wednesday showed the technology sector again gave a big lift to the economic expansion and helped boost the services sector, offsetting a muted performance in financial services. Technology output jumped 29.2 per cent from a year earlier, nearly in line with the 33.8 per cent pace in the prior quarter. Financial industry growth slowed to 2.9 per cent for the second-lowest reading in more than a decade amid a push to curb debt risk.

The supplemental data showed the services sector led the first-quarter expansion with 7.5 per cent growth. China's other two main categories for its economy lagged, with growth from manufacturing and construction accelerating to 6.3 per cent and agriculture slowing to 3.2 per cent. BLOOMBERG