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% 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 6.93tn yuan ($1tn) 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% 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%, and pipped economists’ forecasts of 6.8% 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% 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.