China property boost to GDP risks fading after debt-fueled rise

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. 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.

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

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.

PBOC Gov. 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. 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.

Reports 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 last week.

“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.”

Aggregate financing was 2.34 trillion yuan ($360.7 billion) in March, the PBOC said, 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.

Real estate may face new pressure as big cities take steps to cool red-hot markets. Shenzhen, where new-home prices jumped 57 percent in a year, announced measures to curb speculative homebuying, while Shanghai limited buyer eligibility after new home prices soared 21 percent. Smaller cities face the opposite problem with too many empty homes, complicating national policy making for officials.

Growth also isn’t getting as much support as it did last year from banks and brokers, data showed. 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. Still, he added: “risk continues to rise with a fresh credit boom.” (Bloomberg)