China posted a first quarter GDP growth of 6.9 percent, better than consensus and government estimates. This might sound good, until you get to the reasons behind it. Yet another debt-fuelled stimulus in overcapacity-ridden sectors and a dangerous property bubble.
. China’s total “social financing”, the broad measure of credit and liquidity in the economy, reached a record 6.93 trillion yuan (US$1 trillion) in the first quarter. Total social finance stood at 162.82 trillion yuan at the end of March, up 12.5 percent year-on-year, according to the PBOC data.
At the end of last month, total outstanding yuan-denominated loans stood at 110.83 trillion yuan, up 12.4 percent compared with the previous year.
A 12.5% increase in debt for a 6.9% increase in GDP shows how dangerous and unsustainable this growth is.
At the same time, spending by the central and local governments rose 21 percent from a year earlier. Considering the high level of overcapacity in the economy, further debt-fuelled stimulus only adds to an already problematic situation.
. The real estate bubble has not slowed down. In fact, it is the primary driver of growth in the first quarter. Real estate investment expanded by 9.1 percent year-on-year, with new construction accelerating, despite calls from the government to slow down speculation.
Outstanding real estate loans rose 26.1 percent year-on-year.
All these figures bring total debt in the Chinese economy to 257% of GDP, on its way to 300% in two-three years.
. On the positive side, disposable income growth picked up to 7.0 percent in the first quarter, the fastest since the end of 2015, and March retail sales rebounded 10.9 percent year-on-year driven by the property boom, mostly home appliances, furniture and decorations for new homes.
All in all, the 6.9% growth shows that the drivers of the Chinese economy remain in low productivity, high debt sectors.
More worrying, these figures show that the government seems to have given up on reforms to tackle overcapacity, debt and soaring property prices.
Daniel Lacalle is a PhD in Economics, fund manager and author of Escape from the Central Bank Trap (BEP), Life In The Financial Markets, and The Energy World Is Flat (Wiley).
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