China eases growth slide with debt-driven spending

China eases growth slide with debt-driven spending

More credit and debt-fuelled spending helped China ease a slide in growth, though the momentum may prove short-lived and risks exacerbating ills that have dragged on the economy for years

After wobbling at the start of the year, the world’s second-largest economy steadied in recent weeks to post first-quarter growth of 6.7 % over a year earlier, according to government data of April 15, 2016.

While a tick down from the 6.8 % of the previous quarter, the pace appeared buoyed by signs of stronger economic activity as policies aimed at bolstering growth kicked in. Industrial output, retail sales, new loans and investment in factories, buildings and property rose faster than expected in March.

Having already boosted lending and pledged to front-load fiscal spending, Beijing is likely to take its foot off the gas once it is confident it can reach its growth target, which this year is set at a range of 6.5 % to 7 %.

“We still think that this recovery will not last very long,” said Société Générale Group economists Wei Yao and Claire Huang, in a research note. “But if we are wrong, beware of bubble risks, capital outflows and devaluation pressure on the renminbi.”

China’s economy is showing signs of stress. While investment in factories, buildings and other fixed assets grew 10.7 % over the quarter, the rate was up 23.3 % for state-owned firms and only 5.7 % at private firms. China’s state-owned enterprises tend to be less profitable; last year their profits fell 21.9 %, compared with a 3.7 % increase for private companies. The government has made nurturing the private sector—and the job growth it brings—a priority.

Miao Linqing, founder of a landscape design company in the subtropical provincial capital of Nanning, said higher labour costs and lower demand trimmed his annual earnings to 100,000 yuan last year, half what he made a few years earlier. He said he is also having more trouble getting paid. “Some local governments still owe me a lot of money,” said Mr. Miao. “They pay you a bit at first, but don’t come up with the rest.”

Investment—which amounts to 46 % of China’s gross domestic product, compared with 20 % for the U.S. and 31 % for India—is showing signs of becoming less effective. More capital is being spent on servicing debt and many choice road, rail and other infrastructure projects that offer greatest returns have already been built.

Higher investment in property and infrastructure is also providing a boost to many of the industries that are beset by the excess capacity government has vowed to eliminate. Cement production rose 24 % year on year in March compared with an 8.2 % decline in January and February combined, while crude steel rose 2.9 % last month, compared with a decline of 5.7 % in January-February.

www.wsj.com


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