The dark cloud behind China's new silver lining
Change in government policies sees mainland’s latest economic data bring fresh enthusiasm to the market but also concerns over growth
Financial market players have no doubt that the economic data Beijing released last Thursday were a good thing.
Sure, the headline number was hardly impressive. At 7.4 per cent in the third quarter, China's year-on-year growth rate was the lowest since the financial crisis of early 2009.
But as this column argued last week, the underlying growth picture was actually much brighter.
Industrial production was up, retail sales were strong and investment was picking up. As a result, in quarter-on-quarter terms, gross domestic product was up 2.2 per cent compared with the April-June period.
That equates to an annual growth rate of 9.1 per cent, and represents a big rebound from the lacklustre growth recorded earlier in the year.
As a result, investors greeted the news with enthusiasm.
Since Thursday, the CSI 300 index of large mainland-listed stocks has rallied 1.8 per cent. That might not sound like much, but for an index that is down by 0.2 per cent over the year so far, it is a major gain. Meanwhile, Hong Kong's H-share index of locally listed mainland companies has climbed 2.4 per cent.
As usual, however, wherever there is a silver lining, there is a dark cloud brooding.
The problem here is not the rate of China's growth, so much as the mixture of its components.
The slowdown China experienced earlier in the year was almost entirely self-inflicted; the result of government policies aimed at rebalancing the economy away from an unsustainable reliance on debt-fuelled investment, especially in the property sector, and more towards private consumption.
After investment reached a record 46 per cent of GDP last year, and with domestic loans standing at a massive 173 per cent of GDP, calls for rebalancing reached deafening volumes.
With consumer spending already growing in line with incomes at a nominal rate (that is not adjusted for inflation) of about 13 per cent a year, rebalancing could only happen through a slowdown in investment growth.
So to slow investment, the authorities imposed tighter credit quotas and slapped restrictions on the property market.
By and large, the policy worked. The rate of credit creation slowed, the pace of investment dropped, and it began to look as if the economy was starting to rebalance.
Of course, overall growth also fell. And that was the root of the problem. Someone in authority took fright at the declining growth rate and ordered the credit taps opened again.
The first chart shows China's overall rate of credit creation (expressed as the year-on-year increase in the three month moving average of new financing). As you can see, the rate of new credit creation has exploded over the past three months.
And the second chart compares the growth in fixed asset investment (again as a three-month moving average) to growth in retail sales.
Admittedly, these are imperfect measures. Fixed asset investment includes land purchases, while retail sales include wholesale trade and much government procurement, but not sales of services.
Even so, it is clear that after briefly falling below consumption growth at the beginning of the year, the rate of investment growth has rebounded over the past few months.
In other words, by loosening policy to support growth, the authorities have reversed the economic rebalancing trend that Beijing worked so hard to achieve earlier in the year.
That means, although growth has recovered, China's economic trajectory is once again becoming less, rather than more, sustainable.