China not out of the woods yet despite strong growth in first quarter
Policymakers need to finish economic restructuring to reduce overcapacity and the financial risks posed by hot-money flows and global uncertainty
The mainland’s first-quarter GDP growth of 6.9 per cent year on year, compared with a full-year target of 6.5 per cent, would have come as a relief to economic policymakers. Moreover, growth was stronger towards the end of the quarter, suggesting it has carried over into the current quarter. But policymakers should be under no illusions about the sustainability of the main growth drivers and the need for vigilance in the months ahead, amid likely tightening measures and external uncertainties that have the potential to impact on China, such as anti-globalisation sentiment in Europe.
Domestic consumption held up better than expected as growth rebounded to its highest level since the autumn of 2015. This was thanks in part to strong credit expansion, including for property investment, and a surge in industrial activity, including government-led investment, despite repeated pledges by the leadership headed by President Xi Jinping (習近平) to reduce debt levels in the economy and shake out the bloated industrial sector.
During the recent sessions of the National People’s Congress and Chinese People’s Political Consultative Conference, state leaders insisted the economy was in good shape to adapt to adjustments in the development model. But they face continuing challenges in striking the right balance with policy measures to steer the country towards sustainable growth. One example is the surplus of hot money looking for somewhere to invest, as the authorities keep a tight grip on capital outflows to help support the yuan and safeguard the country’s foreign exchange reserves. Official figures reveal a 30 per cent year-on-year slump to US$7 billion in outward-bound direct investment in foreign deals in March alone. In the first three months of this year, non-financial ODI tumbled 48.8 per cent to US$20.54 billion from the same period last year. Some of that hot money is now flowing into the property market, including speculation in new development areas, reflected in first-quarter property investment jumping by a two-year high of 9.1 per cent. This is a problematical contributor to growth that is likely to fall away as measures to cool the property market introduced over recent months begin to have a more obvious impact during the current quarter.
With the immediate threat of a trade war with the United States having receded, the first round of the French presidential election later this month is a key test of external sentiment towards European unity and globalisation. Even assuming isolationist and protectionist forces are defeated, China is not out of the woods yet. It needs to finish economic restructuring to reduce overcapacity and the financial risks posed by hot-money flows and global uncertainty.