China's Economy Stabilized in First Quarter

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Breaking Down China's GDP, Retail Sales Data
  • GDP expands 6.7% as retail, factory output, investment pick up
  • Credit surge raises question marks over growth sustainability

China’s economy stabilized last quarter and gathered pace in March as a surge in new credit spurred a property sector rebound while raising fresh questions over the sustainability of the debt-fueled expansion.

Gross domestic product rose 6.7 percent in the first quarter from a year earlier, meeting the median projection of economists surveyed by Bloomberg and in line with the government’s growth target of 6.5 percent to 7 percent for the full year. New credit, industrial output, fixed-asset investment and retail sales picked up in March and beat analysts’ forecasts.

China’s Slowing Economy

Signs of stabilization in the world’s second-biggest economy and bets on a subdued pace of U.S. monetary tightening have helped lead to recent rallies in oil, metals and global equities. Surging credit in March now shifts concern back to the durability of the recovery, how much financing is propping up zombie companies, and whether the market-driven reforms needed to boost new growth drivers will quicken.

“The economy has stabilized thanks to a flood of liquidity and improved sentiment in the property market,” said Tao Dong, head of Asia economics excluding Japan at Credit Suisse Group AG in Hong Kong. “It is not clear whether the momentum is sustainable. So far, the government seems to be the solo singer. It is critical to re-engage private investment.”

Aggregate financing was 2.34 trillion yuan ($360.7 billion) in March, the People’s Bank of China said, as monetary easing filtered through the financial system. Quarter-on-quarter growth in the first three months of this year was more than double the pace during the prior period, said Tim Condon, head of Asian research at ING Groep NV in Singapore.

Debt Pileup

“The flip side of strong credit growth is that debt keeps piling up,” said Zhu Haibin, chief China economist at JPMorgan Chase & Co. in Hong Kong. “This can’t continue. The key is efficiency of credit use because we know that some of the credit is used to keep these zombie companies alive.”

QuickTake China’s Debt Bomb

Easy credit helped home sales jump 71 percent in March from a year earlier while investment in real estate development rose 6.2 percent in the first quarter.

The government has also upped its fiscal firepower to boost growth. Spending surged 20.1 percent in March while the revenue only increased 7.1 percent, according to Ministry of Finance data released Friday.

Fixed-asset investment jumped 10.7 percent in the first three months from a year earlier, as property construction rebounded. About 30 percent of new non-financial credit flowed to local governments and their investment vehicles in the first quarter, said Harrison Hu, chief Greater China economist at Royal Bank of Scotland Plc in Singapore.

While easing has propped up the economy for now, the rebound will quickly fizzle without continuous policy support, according to Frederic Neumann, co-head of Asian economics research at HSBC Holdings Plc in Hong Kong.

"With growth stabilizing, this is the chance for officials to press on with reforms," Neumann said. "Stimulus in the end will mean nothing without far-reaching reforms that ultimately wean the economy off its debt dependency."

Industrial output expanded 6.8 percent in March from a year earlier and retail sales rose 10.5 percent. The survey-based unemployment rate rose slightly in March to around 5.2 percent, a statistics bureau official said.

The steady pace of China’s deceleration has raised doubts with some analysts. Bloomberg’s monthly GDP tracker, which draws on a range of monthly indicators including electricity production and exports, has shown more pronounced swings, with growth accelerating to 7.11 percent in March from 6.32 percent in January.

China has been making the transition from heavy industries to a services-led and consumption-driven economy, creating new winners in startups and media and losers in fading industries like coal and steel. The government is seeking to reduce overcapacity at heavy industrial plants without derailing the economy or slashing too many jobs.

“With the outlook for most other organic growth drivers still subdued -- especially corporate investment and exports -- the government will need to continue to rely on stimulus, notably infrastructure investment, to prevent growth from falling below its overly ambitious medium-term growth target of 6.5 percent next year,” Louis Kuijs, chief Asia economist at Oxford Economics in Hong Kong, wrote in a note.

— With assistance by Xiaoqing Pi, and Kevin Hamlin

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