China: Will the encouraging figures become cause for concern?

CHART OF THE WEEK

 

Chinese first quarter 2016 growth was in line with economist’s expectations at +6.7% year-on-year compared with +6.8% for the previous quarter. However, figures for March were better than expected: investment grew at its fastest pace in nine months (+11.2% year-on-year), industrial output and retail sales improved and credit expansion continued to grow.

Graphweek15eng

 

Our Analysis

The improved economic momentum seen at the end of the first quarter indicates that the authorities’ stimulus policies are starting to yield results. They are particularly effective in the real estate sector, with housing sales up 40% year-on-year, housing starts gathering pace and a pick-up in investment.

In the short-term, this should calm fears over a sharp slowdown in China, and help underpin the improved market sentiment noticeable in recent weeks. However, in the medium-term we believe that Chinese growth will have to slow down to avoid aggravating excessive private sector debt levels. The central bank is said to be finalising regulations authorising certain commercial banks to issue debt-equity swaps.

Overall, we believe that China’s recovery is encouraging for now but would be cause for concern if it delayed corporate sector deleveraging and the transition towards a consumer-led economy.

 

 

The opinion expressed above is dated April 15th, 2016 and is liable to change.

 

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Julien-Pierre Nouen

Directeur des études économiques et de la gestion diversifiée