China is expected to report on Monday that its economy grew 6.8 percent in the first quarter, well above Beijing’s full-year target, buoyed by surging government infrastructure spending and a gravity-defying property market that is showing signs of overheating. A strong reading could help wobbly global financial markets but add to worries that China’s government is still relying too heavily on old growth engines like the stimulus and not doing enough to tackle risks from an explosive build-up in debt.
Though policymakers have pledged repeatedly to push reforms to head off financial risks and asset bubbles, the government is seeking to keep the world’s second-largest economy on an even keel ahead of a major leadership transition later this year. Beijing has set a slightly more modest growth target of around 6.5 percent for this year, theoretically offering more wiggle room for reforms after the economy grew 6.7 percent in 2016 – the weakest pace in 26 years.
Most economists polled by Reuters expect the economy expanded 6.8 percent in the first quarter from a year earlier, the same pace as in the fourth quarter of 2016. On a quarter-on-quarter basis, it likely grew 1.6 percent in January-March from the previous three-month period. Economists at ANZ reckon growth may even clock in at 6.9 percent in the quarter, pointing to strong property and infrastructure investment.
“The announcement in early April of the construction of the Xiongan new economic zone, which requires massive infrastructure spending, suggests Chinese authorities are likely to rely more on investment to stabilise growth in the next few years,” ANZ said in a note. China’s long-ailing industrial sector has been posting its best profits in years, thanks to higher prices for steel and other building materials, giving “smokestack” industries more cash flow to pay off debt and invest in more efficient plants.
China’s export outlook also brightened considerably on Thursday as it reported forecast-beating trade growth and as U.S. President Donald Trump softened his anti-China rhetoric in an abrupt policy shift, though the risk of U.S. protectionist trade action is by no means off the table. Still, many analysts expect economic growth to cool later this year as the impact of earlier stimulus measures starts to fade and as local authorities resort to ever-tougher measures in a bid to get soaring home prices under control.
ACCUMULATED PROPERTY CURBS
Most analysts don’t see a price crash but believe the accumulated weight of property curbs will eventually translate into weaker sales, construction and investment. China imported the most iron ore on record in the first quarter, but iron ore and steel futures prices are nosediving on fears that its steel production is outweighing demand.
Beijing also is continuing to rely heavily on new credit to generate growth as productivity slows, despite worries about debt risks.
China’s banks extended the third highest loans on record in the first quarter, though March lending was less than expected. At the same time, China’s central bank has shifted to a tightening bias and is using more targeted measures to contain risks in the financial system, after years of ultra-loose settings.
MORE RATE INCREASES?
The People’s Bank of China (PBOC) has raised short-term interest rates several times already this year while boosting its regulatory oversight. Analysts predict further modest rate increases this year, but do not expect a full-blown policy rate hike as authorities fear tapping the brakes too hard would stunt economic growth.
The Organisation for Economic Co-operation and Development (OECD) says China’s total private and public debt has exceeded 250 percent of GDP, up from 150 percent before the global financial crisis. “While the authorities obviously recognise the risks, credit has continued to expand at a pace that looks unsustainable,” analysts at Barclays said.
“Although this does not necessarily equate to the risk of an imminent crisis, the apparent plan to ‘kick the can down the road’, at least past the Party Congress, means that problems left to fester may become more difficult to resolve.”