China’s first-quarter economic surge was primarily a reflection of how hard the world’s second-largest economy was hit by the Covid-19 pandemic early last year, rather than the strength of its recovery.

While gross domestic product grew more than 18 per cent year on year between January and March, its increase over the final quarter of 2020 was just 0.6 per cent.

China is expected to post a year-on-year headline number of about 8 per cent when the National Bureau of Statistics reveals its estimate for second-quarter growth on Thursday. The focus, however, will be on signs of economic sluggishness and whether these are worrying enough for the government to adjust policy.

Here are five things to look out for after Thursday’s announcement.

China’s economy received a big boost from industrial production, up 24.5 per cent year on year in the first quarter, and fixed asset investment, which increased 25.6 per cent year on year in March.

Both are associated with the debt-fuelled, “low quality” growth model that Chinese officials, led by Liu He, the vice-premier, want to move away from but tolerated to help the country recover from the pandemic. Over recent months they have softened. Industrial production growth was up 15.4 per cent year on year in May, while annual increases in fixed asset investment slipped below 10 per cent in both April and May.

The People’s Bank of China on Friday lowered the amount of reserves banks must maintain by 50 basis points, to 8.9 per cent on average. It was the first such reduction since March 2020.

Analysts are divided if the central bank will now accelerate monetary easing. Wei Yao, an economist at Société Générale, thinks it will. “This tool is never used when the economy is doing well,” she noted, adding that another reserve cut was likely before the end of the year as well as a possible interest rate cut in 2022.

Others, however, take the central bank at its word when it said last week’s reserves cut was mainly intended to counter reduced liquidity as medium-term lending facilities expire.

“The main purpose for the cut is to lower costs for companies by lowering costs for banks,” said Larry Hu, chief China economist at Macquarie. “We don’t think [the] cut signals a new easing cycle or a worse than expected economic slowdown ahead.”

The PBoC’s reserves cut came just two days after the state council, China’s cabinet, urged it to do so. But the central bank had ignored a similar call by the government in June 2020, in a sign of the ever-present tension between officials worried about financial risks and those more concerned about stoking growth.

Those in Liu’s camp are concerned that looser monetary policy can spur reckless borrowing, which contributed to a wave of bond defaults in two of China’s biggest industrial provinces last year. China’s largest bad debt manager and some of the country’s biggest property developers are also struggling to restructure their debt loads.

“China is running out of time to deal with its mountain of bad debt and resulting financial risk,” said Diana Choyleva at Enodo Economics, adding that 2021 would probably be “a distinctly binary year” for the Chinese economy.

But supporting economic growth is always a priority during crises such as the pandemic, as well as ahead of important political events such as the Chinese Communist party’s celebration of its centennial this month. This tension will continue as the party tries to find a balance between boosting growth and reducing financial risks ahead of next year’s 20th party congress, at which President Xi Jinping is expected to begin an unprecedented third term in power.

One sign of who is winning the policy argument will be bond issuance and investment by local government finance vehicles, which play a central role in infrastructure investment.

Overall infrastructure investment fell 3.6 per cent year on year in May, the first annual decline since last year’s Covid outbreak in Wuhan shut down much of China’s economy. Special purpose bond issuance totalled only Rmb1.2tn ($186bn) over the first five months of this year, compared with Rmb2.3tn over the same period last year.

While China remains on track to fully vaccinate 70 per cent of its population by the end of the year, it shows no sign of abandoning its “zero-Covid” approach to the pandemic. This will probably restrict inbound and outbound travel to negligible levels until at least through next year’s Winter Olympics in Beijing, while also taking extreme measures whenever outbreaks do occur. The draconian response to a recent cluster of infections at one of the country’s biggest ports resulted in huge disruption for exporters.

It is a reminder that while China has successfully contained the pandemic, its impact on some sectors of the economy will continue to be felt well into next year, if not longer.