China’s First-Quarter GDP Growth Highlights Rebalancing Shortfalls

MORE UNRUFFLED WATERS for the Chinese economy–at least on the surface. First-quarter GDP growth, as reported by the National Bureau of Statistics, came in at 6.9% year-on-year.

That is its fastest pace in six quarters and the first back-to-back quarterly increase in GDP in seven years. The first-quarter number is also well in line with the 6.5% official annual growth target set last a month.

However, a closer look at the components of growth suggests that deeper currents swirl dangerously, and particularly that the old-school model of state investment-led growth still holds sway. Fixed asset investment in the first quarter, up 9.2%, was an acceleration from 2016’s 8.1% growth rate. Infrastructure investment rose by 23.5% while real estate development was up 9.1%. Industrial production also rose.

Worryingly for the rebalancing of the economy towards greater domestic consumption, retail sales growth slowed to 10% in the first quarter from 2016’s 10.4% expansion.

US President Donald Trump’s backing off from threatening a trade war with China because he needs Beijing’s cooperation in dealing with North Korea has provided breathing room for China’s economy, which it appears to be exploiting with some gusto.

The stimulus that Beijing has given the economy has led the International Monetary Fund to raise its forecasts for China’s growth this year and next in its latest World Economic Outlook to 6.6% and 6.2% respectively. That is 0.1 and 0.2 percentage points higher than its January forecasts and 0.4 and 0.2 percentage points higher than its October 2016 forecasts.

The question remains, however: how sustainable can this pace of growth be long-term without rebalancing taking more substantial hold and the problem of excess leverage being tackled?

As the IMF puts it:

The medium-term outlook, however, continues to be clouded by increasing resource misallocation and growing vulnerabilities associated with the reliance on near-term policy easing and credit-financed investment.

At some point, as prime minister Li Keqiang again emphasised, Beijing will have to switch growth gears. That will mean unwinding its most recent stimulus–very carefully. But that is unlikely to start happening until after President Xi Jinping has consolidated his political control at the critical Party plenum later this year.

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