Debt appears to fuel Chinese stabilisation

China posted its slowest economic growth since 2009 but a surge of new debt appears to be fuelling a recovery in factory activity, investment and household spending in the world’s second largest economy.

That is good news in the near-term, economists say, but many worry it marks a return to the old playbook used during the financial crisis, when Beijing hand-cranked its economy out of a slowdown through massive stimulus, rather than structural reform.

Official data showed China’s gross domestic product grew at an annual rate of 6.7% in the first quarter of the year, easing slightly from 6.8% in the fourth quarter as expected. However, other indicators released showed new loans, retail sales, industrial output and fixed asset investment were all better than forecast.

While analysts say the data is evidence of a bottoming out in the economy’s slowdown, some warn that the first quarter of 2015 got off to a similarly glowing start before a stock market crash later that year.

“What this shows is a stabilisation of the old economy,” said Raymond Yeung of ANZ, pointing to recovery in industrial production and fixed asset investment.

“I would still be a bit cautious about headline growth... last year’s 6.9% figure was underpinned by a massive contribution from financial services, and the strong loan and credit growth recently and the recent resumption of IPO activity suggests this could still be a big contribution.”

The National Bureau of Statistics said in a press conference in Beijing yesterday that while main economic indicators showed positive changes, “downward pressure cannot be underestimated”.

Beijing hopes a recovery — even a credit-fuelled one — can be sustained to avoid the need for more aggressive stimulus that could reinflate asset bubbles. Chinese banks extended 1.37trn yuan (€188bn) in net new yuan loans in March, nearly double the previous month’s lending, suggesting renewed appetite for investment among Chinese corporates.

China’s retail sales growth quickened to 10.5% in March from 10.2%, slightly above forecasts, while fixed-asset investment growth rose to 10.7% year-on-year in the first quarter from 10.2%, beating market expectations of 10.3%. Industrial output growth leapt up to 6.8% from 5.4%, surprising analysts who expected a rise of 5.9% on an annual basis.

“Today’s released data ought not to distract from the fact that the structural issues facing China’s economy remain unresolved,” wrote Economist Intelligence Unit economist Tom Rafferty in a research note.

“It has taken considerable monetary and fiscal policy loosening to stabilise economic growth at this level and this effort has distracted from the reform agenda that is fundamental to long-term economic sustainability.”



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