China’s economy expanded faster than expected in the first quarter as higher government infrastructure spending and a gravity-defying property boom helped boost industrial output by the most in over two years.
Growth of 6.9 percent was the fastest in six quarters, with forecast-beating March investment, retail sales and exports all suggesting the economy may carry solid momentum into spring.
But most analysts say the first quarter may be as good as it gets for China this year, and worry Beijing is still relying too heavily on stimulus and “old economy” growth drivers, primarily the steel industry and a property market that is showing signs of overheating.
“The Chinese government has a tendency to rely on infrastructure development to sustain growth in the long term,” economists at ANZ said in a note.
“The question we need to ask is whether this investment-led model is sustainable as the authorities have trouble taming credit. We need to watch closely whether China’s top leadership will send a stronger signal to tighten monetary policy shortly.”
Even as top officials vowed to crack down on debt risks, China’s total social financing, a broad measure of credit and liquidity in the economy, reached a record 6.93 trillion yuan ($1 trillion) in the first quarter — roughly equivalent to the size of Mexico’s economy.
At the same time, spending by the central and local governments rose 21 percent from a year earlier.
That helped goose the pace of growth in the first quarter well above the government’s 2017 target of around 6.5 percent, and pipped economists’ forecasts of 6.8 percent year-on-year.
Such a strong bolt from the gate could see Beijing once again meet its annual growth target, even if activity starts to fade later in the year, as many analysts widely expect.
“Main indicators were better than expected…which laid a good foundation for achieving the full-year growth goals,” statistics spokesman Mao Shengyong said at a news conference.
SAME OLD GROWTH DRIVERS?
Once again, China’s policymakers leaned on infrastructure and real estate investment to drive expansion in the first quarter. Growth in both areas has accelerated from last year and helped offset slightly weaker growth in the services sector.
“Faster growth in industrial output is the primary factor in the first quarter surprise, and due mostly to higher value-added growth related to supply-side consolidation in heavy industry,” said Brian Jackson, China economist at IHS Global Insight.
Real estate investment also remained robust in the first quarter, expanding by 9.1 percent on-year, and the pace of new construction quickened despite intensifying government measures to cool soaring prices.
Most analysts agree the heated property market poses the single biggest risk to China’s economic growth, but predict the cumulative weight of property curbs will eventually temper activity, not produce an outright crash.
“Sales have started falling, which means tightening measures are starting to take effect,” said Shen Jianguang, an analyst at Mizuho Securities in Hong Kong, noting that will start to drag on both the services and construction sectors.
More than two dozen cities announced new or additional property cooling measures in March and early April, after curbs late last year appeared to have little lasting effect.
Buoyed by a near 12 percent increase in housing starts, China produced a record amount of steel in March, Reuters data showed, though analysts say warning signs are flashing.
Rising inventory levels and recent falls in steel prices suggest output has been growing faster than China’s actual demand, raising worries of a glut later in the year, which could heighten trade tensions with the U.S. and its other major trading partners.
INCOME GROWTH PICKS UP
There were also positive signs on the consumer front in Monday’s data dump.
After slowing for five quarters, disposable income growth picked up to 7.0 percent in the first quarter, the fastest since the end of 2015.
March retail sales rebounded 10.9 percent on-year as consumers shelled out more for home appliances, furniture and decorations for new homes.
Auto sales also showed signs of recovering after weakening in the first two months of the year after the government reduced subsidies on small cars.
Analysts are closely watching for signs that consumption is accounting for a greater share of China’s economy, which would
not only make growth more resilient and broader based but also reduce the need for more debt-fueled stimulus and reliance on “smokestack” industries.
FOCUS ON STABILITY, THEN REFORMS
Though policymakers have pledged repeatedly to push reforms to head off financial risks and asset bubbles, the government is seeking to keep the economy on an even keel ahead of a major leadership transition in later this year.
China’s central bank has gingerly shifted to a tightening policy bias in recent months, and is using more targeted measures to contain risks in the financial system, after years of ultra-loose settings.
It has bumped up interest rates on money market instruments and special short- and medium-term loans several times already this year and further modest increases are expected, especially if U.S. rates continue to rise.
“I think China should be directing the economy to slow down its growth in the long term…but on the contrary, growth is accelerating,” said Hidenobu Tokuda, senior economist at Mizuho Research Institute in Tokyo.
“This is good for now but it makes it difficult to see how China’s economic slowdown will land in the future. Uncertainties remain high.”
(Reporting by Kevin Yao and Yawen Chen; Writing by Elias Glenn; Editing by Kim Coghill)
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