Credit and State-led growth is counter to a range of medium-term reform priorities
By Brian Jackson, China Economist, IHS Global Insight
Key Points:
· Chinese real GDP growth decelerated to 6.7% in the first quarter, slightly above expectations.
· While real growth slowed most in China’s relatively small agriculture sector, due to a harsh winter, the slowdown in the much larger services sector was the more important drag on the headline figure.
· Detailed growth within service sectors is not yet available, but we suspect a financial sector deceleration outweighed acceleration in the real estate sector.
· Authorities will publish official sub-sector GDP figures this weekend.
· Price growth returns after a year of deflation. China’s economy-wide deflator was in contraction throughout all of 2015, but eked out modest growth in the first quarter of 2016.
· The improvement came from shallower deflation in industry and construction, and extremely fast price growth in agriculture, again due to the colder than average winter.
· Price growth in services moderated slightly, but remained healthy overall at 3.3%.
· Based on first quarter data, we project China’s debt to GDP ratio will rise 15 percentage points in 2016 to about 230%, the largest annual increase in 7 years. By comparison, that figure surged 30 percentage points in 2009.
Outlook :
In the near term, the first quarter data sharply lowers the chance of monetary policy easing. Stronger-than-expected growth in the first quarter does not change our expectations of growth deteriorating in the second quarter. That continued slowdown will remain concentrated especially in finance.
More broadly, first quarter data tells a concerning story about how economic policy makers are responding to China’s continued slowdown. The Chinese government’s active hand in a challenging year is widely expected and to a degree welcomed, but the magnitude of new financing is worrying. Similarly, state-owned enterprises’ return as leaders in rebounding investment and output growth is a haunting reminder of mistakes committed during the 2009-10 stimulus effort. These indicators remain well below their peaks during that period, but are moving in the wrong direction at an accelerating pace. Should this accelerated rate of debt accrual and state-led growth continue for several quarters, it will cast serious doubt on how comprehensive China’s reform program might be during 2016-17, despite many other positive signals in recent months about willingness to tackle difficult issues.