Strong growth in China – bought with high government debt

China’s economy visibly picked up steam at the beginning of the year. The upturn, which was first tentatively indicated by an improvement in sentiment surveys as of the middle of last year before firming up in countless leading indicators, is now also reflected in better growth figures. Yesterday, Easter Monday, the Chinese statistics office announced that GDP growth in Q1 2017 had been 6.9 percent. In other words, the rate not only topped that of Q4 2016, when growth had been 6.8 percent and had thus already accelerated slightly, but also favourably outperformed market expectations.

The differences may be small and would hardly be worth mentioning with regard to other economies. However, for China the announcement of the slightly faster pace of growth is notable. After all, hardly two years have passed since turbulence in the Chinese financial markets sparked major concerns about the Chinese economy’s stability. At the same time there were increasing doubts as to whether the official growth rates reported actually sufficiently reflected the Chinese economy’s real slowdown in growth. There can probably be no disputing the fact that China’s official GDP figures are politically influenced. However, if growth rates are now being reported as rising and countless other indicators reinforce the impression that the economy is gaining momentum, it would seem clear that growth in China has steadied up for the time being.

Most recently, private investments provided a stimulus; they were brisker again, having still as good as stagnated in mid-2016. The export cycle has also noticeably recovered since the beginning of the year and in the wake of two years with falling exports booked a fat plus again in Q1 2017. Chinese exporters scored significant sales successes in particular in the other major emerging markets. This upturn is now also visible in industrial activity: industrial output leaped to a two-year high of 7.6 percent in March.

Nevertheless, doubts are still in order as regards the sustainability of the current upturn. After all, it was bought at the price of a major investment boost by government infrastructure measures and a clear expansion in loan approvals. Increasingly, the alternative financing channels through the grey zones of the shadow banking system, which Beijing combatted for many years, are being permitted again. In this way, investment activities in the private sector have presumably also become appreciably brisker. By contrast, the push provided by government investing activities has eased off again. However, what remains is the accumulated debt, which has clearly increased once more as a result of these measures. Above all, the debt burden borne by the Chinese corporate sector is unparalleled world-wide, at over 160 percent of economic output. Thus the risks to the country’s financial stability continue to rise. Yet it will hardly be possible to brake the increase in debt without stripping quite a few points of growth. Beijing, however, recently rejected such a plan.

This means that China’s economic prospects remain favourable for now. The very good economic sentiment, which steadily improved in the course of last year, points to robust growth in the second quarter and speaks against a renewed, more pronounced drop in growth rates. This would, also in the light of the political aspects, be fairly improbable. China’s export sector in particular looks set to gain as the global economy starts to pick up pace. We therefore assume that the further course of the year will see the growth rate remain more or less the same. For the year as a whole, the GDP growth rate may actually turn out slightly higher than last year, and thus easily meet the official target for this year of “6.5 percent or above”.

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