There's little to celebrate in China's rebounding growth
The mainland's ongoing investment boom is making the economy even more distorted while debt levels are becoming worryingly high
There's a mood of celebration in Hong Kong's financial community.
Earlier this week, the mainland came out with its monthly data-dump, and the numbers all pointed towards a clear acceleration in economic activity.
Confirming the picture painted by earlier purchasing managers' indices, China's industrial production was up 10.4 per cent compared with a year earlier, its fastest rate of growth in 17 months.
Electricity generation - favoured by many as a reliable indicator of overall output - also shot up. Exports picked up, and retail sales accelerated.
Put together, the data all indicated one thing: after a brief moderation in pace, China's economy is rebounding.
In response Deutsche Bank raised its growth forecast for the third and fourth quarters, and lifted its forecast for next year to 8.6 per cent.
Stockmarket investors had already reached the same conclusion. Since China's liquidity squeeze abated at the end of June, the Shanghai composite index has climbed 13 per cent, while Hong Kong's H-share index of mainland companies is up 14 per cent.
Unfortunately, it looks as if the market's jubilation is misplaced. Although the pace of activity on the mainland has picked up, the source of the growth is hardly encouraging.
August's rise in industrial production was propelled largely by an increase in output from state-owned heavy industries. Steel production, for example, surged 15.6 per cent compared with a year earlier.
The demand for that steel was driven by stepped-up investment, much of it in infrastructure projects. Overall, fixed-asset investment was up 21.4 per cent from last August.
In other words, China's investment boom continues unabated. Investment is still growing faster than total output, which means that far from rebalancing towards domestic consumption, the economy is becoming even more distorted.
And much of that investment is being funded by a flow of credit that shows no signs of drying up any time soon.
Many analysts had expected China's credit expansion to slow following June's liquidity squeeze, which was widely interpreted as a signal from the authorities to the financial system to curb its lending through the shadow market.
But although the volume of loans extended by the formal banking system was modest in August, data released on Wednesday showed a rebound in off-balance sheet financing, for example through company to company loans brokered by banks.
As a result, as the first chart shows, Beijing's broad "total social financing" measure jumped from 809 billion yuan of new financing in July to 1.57 trillion yuan in August.
This unchecked expansion is troubling. As the second chart illustrates, China's total outstanding stock of credit, including bank loans, shadow market loans and corporate bonds, has now reached an estimated 208 per cent of gross domestic product.
For one thing, this is getting worryingly close to the sort of debt to GDP ratios which in other countries have precipitated devastating financial crises and deep economic slumps.
More to the point, however, the continued rapid pace of credit growth emphasises just how tough it will be for Beijing to press forward with its programme of economic liberalisation.
To be meaningful, any economic reform must involve overhauling the financial system - and in particular the mechanism for pricing and allocating credit - in order to ensure that capital is deployed more efficiently.
The longer the credit boom goes on, the more difficult, painful and expensive that badly needed overhaul will become.
Unfortunately, there are no signs of it coming to an end yet.