Photographer: Qilai Shen/Bloomberg

China Property Boost to GDP May Wane After Debt-Fueled Rise

  • Real-estate industry gains 9.1% and construction rose 7.8%
  • Data mismatch adds to skepticism about true GDP growth rate

China’s expansion may face stronger headwinds this year should the debt-fueled boost from real estate, a key driver of recent economic growth, prove unsustainable.

The economy grew 1.1 percent in the first quarter from the prior quarter, the slowest quarter-to-quarter expansion in data since 2011, the National Bureau of Statistics said Saturday. Housing demand helped boost growth, with output of real-estate services adding 9.1 percent from a year earlier while construction activities rose 7.8 percent, NBS said.

Saturday’s reports take some of the shine off of Friday’s data showing 6.7 percent growth from a year earlier and better-than-forecast strength in March across a range of indicators. While surging home sales and property investment have supported expansion, economists say it remains to be seen whether debt-aided growth can hold up, and more stimulus maybe needed to sustain the 6.5 percent to 7 percent government growth target.

QuickTake China's Debt Bomb

"Growth is still under pressure and the economy remains fundamentally weak," said Zhou Hao, an economist at Commerzbank AG in Singapore. "China will continue the easing measures" by cutting the main interest rate and required-reserve ratios for big banks.

Data Mismatch

The 1.1 percent quarter-on-quarter expansion fell short of the 1.5 percent rate forecast by economists surveyed by Bloomberg. Year-on-year growth of 6.7 percent announced Friday matched forecasts for the slowest quarterly expansion since the first quarter of 2009.

Such divergence may be cause for consternation as the accumulated quarter-on-quarter data over the last year indicates annual growth in the first quarter was just 6.3 percent, according to Bloomberg Intelligence economists Tom Orlik and Fielding Chen. They added that amid data reliability concerns, it only adds to skepticism about the true growth rate.

"China’s growth rates for quarter-on-quarter and year-on-year GDP for the past year don’t match," Orlik and Chen wrote in a report Sunday. "That, combined with confirmation that first quarter output was underpinned by an unsustainable resurgence in real estate, tarnishes the newly acquired shine on the country’s economic prospects."

PBOC Governor Zhou Xiaochuan, who has cut the main rate six times since late 2014 to a record low and reduced bank reserve ratios, said the economy had a good start to the year and the fundamentals will remain sound in the long run, according to statement on the PBOC website Saturday. He reiterated that China will pursue prudent monetary policy in a flexible and moderate way while keeping reasonable and ample liquidity.

The yuan has "remained basically stable against a basket" of currencies, Zhou, in Washington for the World Bank-International Monetary Fund meetings, said in another statement to the IMF’s steering committee. China will pursue market-based exchange-rate reform, and keep the yuan basically stable at a reasonable and equilibrium level, he said.

PBOC research bureau chief economist Ma Jun, also at the meetings, said in a speech that recent data points including real estate investment growth, industrial value-added growth, and producer prices indicate the outlook is probably better than some economist forecasts. Headwinds include relatively high corporate leverage, Ma said.

Exceeding Estimates

Reports Friday showed new credit, industrial output, fixed-asset investment and retail sales picked up in March and beat analysts’ forecasts. The government 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.

"Overall our sense is of an extremely aggressive effort to utilize both fiscal and monetary stimulus in an attempt to stabilize the economy," Michael Shaoul, chief executive officer of Marketfield Asset Management in New York, wrote in a note. "The effects are uneven, producing pockets of much stronger activity (such as real estate sales) while other portions of the economy remain under substantial pressure."

Raising Forecast

Deutsche Bank AG on Friday raised its second-quarter growth forecast to 7 percent year-over-year, up from 6.8 percent. Chief Economist Zhiwei Zhang wrote in a note growth may slow in the second half of 2016, maintaining a 6.7 percent full-year growth projection. The economy expanded 6.9 percent last year, the slowest pace in a quarter century.

Aggregate financing was 2.34 trillion yuan ($360.7 billion) in March, the PBOC said Friday, far exceeding analyst expectations with one of the highest readings of recent years. While new credit spurred a property rebound, it also raises questions over the sustainability of the debt-fueled expansion.

Data Monday showed home prices accelerated in March. New-home prices excluding affordable housing climbed in 62 cities, compared with 47 in February, among the 70 cities tracked by the government, the National Bureau of Statistics said.

Real estate may face new pressure as big cities take steps to cool red-hot markets. Shenzhen, where new-home prices jumped 62 percent in a year, announced measures to curb speculative homebuying, while Shanghai limited buyer eligibility after new home prices soared 25 percent. Smaller cities face the opposite problem with too many empty homes, complicating national policy making for officials.

Boom, Bust

Growth also isn’t getting as much support as it did last year from banks and brokers, data showed Saturday. The financial sector rose 8.1 percent in the first quarter, compared with a jump of 15.9 percent a year earlier, amid the stock market boom and subsequent bust.

Still, the long-term move toward services and a more consumer-led economy is offsetting declines in the old model for growth in heavy industry and exports. The tertiary sector, as services are known, increased 7.6 percent in the first three months from a year earlier.

More supportive policy measures are very likely as the government "will do what it takes" to achieve its growth target, according to Ding Shuang, chief China economist at Standard Chartered Plc in Hong Kong. He projects 2016 growth of 6.8 percent.

"The remarkable changes in the economic growth landscape suggest that expansionary fiscal and monetary policies are gradually feeding through to the economy," he wrote in a report Friday. Still, he added: "risk continues to rise with a fresh credit boom."

— With assistance by Xiaoqing Pi

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