What’s behind China’s Q1 growth rebound?#Caixin Weekly#-Sino-US

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What’s behind China’s Q1 growth rebound?#Caixin Weekly#

While it is beyond doubt that China’s 6.9% economic growth rate in the first quarter of 2017 was better than expected, opinion on the trend of economic growth for the rest of this year remains divided.

Experts who are optimistic about economic growth believe that the Q1 economic growth has something to do with an increase in investments in non-governmental sector and manufacturing, and meanwhile the figure may mark the start of a new round of economic cycle.

On the other hand, experts who are prudent think the figure is just a continuation of the rebounding economic growth rate starting from the latter half of 2016 and uncertainties still remain for future economic growth.

In the 16th issue of 2016, the Caixin Weekly ran a cover story on the rebound of China’s economic growth in the first quarter of 2017, discussing the reasons behind the better-than-expected growth rate and what authorities should do to achieve the growth target.

Below is an excerpt of the article.

Driving forces

According to Niu Bokun, an analyst from Huachuang Securities, one of the most important factors driving the economic growth in the first quarter was the rebound in exports, which contributed around 4.3% percentage points to the GDP growth.

Exports of electromechanical and high-tech products, which increased by 8.6% and 8.0% in Q1, saw a much better performance than exports of labor-intensive products.

Investment, one of the most important forces driving the economic growth, also increased in the first quarter and was the highest since March 2016. The growth of government-led infrastructure investment slowed down in the first quarter, though it still remains high, amounting for 23.5% of the GDP growth.

Meanwhile, despite tighter limits on the housing market, investment in property continued to rise in the first three months.

According to a report by Caixin, real estate developers are still optimistic about the housing market, also because of the tightening property policies, which raised their expectations on the housing price rise.

Non-governmental investments increased by 7.7% in the first three months, which, according to Ning Jizhe, head of China’s statistics bureau, should not only be attributed to the government’s efforts in protecting property rights, but also enterprises’ confidence in the future market performance.

The third economic growth driver, consumption also saw a year-on-year increase of 10.9% in the first three months, thanks in part to the increase in consumption of automobiles and housing sectors.

The rebound in the economic growth, in turn, also helped boost employment and income. Unemployment rate of 31 big cities in the country dropped below 5% by the end of March, and disposable personal income of urban and rural residents increased by 7% on year in Q1.

Debates over sustainability

Although the first quarter economic growth was better than expected, some market participants are worrying about whether the government could smoothly realize its whole-year growth target set in the beginning of this year.

According to Fu Bingtao, a researcher from Agricultural Bank of China, it will be difficult to realize the economic growth target of 2017 if policies for stabilizing economic growth are not fully implemented in the coming three quarters.

The Producer Price Index has been rising since last September, which has pushed the nominal rise of some indexes higher, for example the fixed asset investment. Although the nominal rise in the fixed asset investment improved, the actual contribution it made to the GDP growth was 18.6%, down from the 36.5% of 2016.

While investment in infrastructure surpassed all other sectors in terms of investment in the first quarter, the actual increase was lower than the average increase of 2016 after factoring in inflation, according to Wu Geti, an economist with Huarong Securities.

While optimists believe that an increase in excavator sales during the first quarter shows a rapid increase in investment and may even mean the start of a new round of economic cycle, some market participants think that the increase in excavator sales only represents companies’ demand for machinery upgrade.

“Usually the lifecycle of an excavator is six to eight years, and 2016 and 2017 are just transition years. That the sales of excavators increased in the first quarter has something to do with the companies’ need to upgrade the machines,” according to Li Chao, an analyst with Huatai Securities.

Financial regulation - a double-edged sword

During the Central Economic Working Conference in 2016 and the annual parliamentary meeting in 2017, preventing financial risks was set as the key priority of the country’s financial policies this year.

The interbank negotiable certificates of deposits released by small financial institutions increased to 780 million yuan from the 630 million yuan in the first quarter at the end of 2016, as many were concerned over a tightened macro prudent assessment and financial regulation in the near future. Market participants say the increase in the interbank negotiable certificates of deposit shows the leverage risk in the financial market is increasing.

Meanwhile, Zhong Zhengsheng, an analyst from Caixin Think Tank, noted that some deleveraging measures could slow the increase in non-governmental investment, which may probably hinder the growth of economy.

According to Zhong, the sustainable growth of manufacturing largely depends on the effect of property and infrastructure industry on economic growth. But a high interest rate caused by some deleveraging measures may somehow slow the recovery of manufacturing, even when investment in property and infrastructure continues to increase.

Stepping up reform

As intensifying financial regulation may probably slow economic growth, stepping up efforts to reform the current economic system is necessary to reduce the side effects brought by strict financial regulation.

As the main challenge for China’s economy is a structural problem, good fiscal and industrial policies will be more efficient in upgrading the economic system than the monetary policy, the marginal effect of which is decreasing.

One important aspect in the government’s fiscal policy is the government budget and tax reform. In order to reduce the tax burden of market participants, the central government is planning to reduce over $380 billion in tax income this year.

Clarifying obligations of central and local governments is also a main task in the fiscal reform, which is important in regulating local government activities and improving the local financial system.

The reform focus is also on state-owned enterprises (SOEs) which are regarded as less efficient and less innovative. The country is trying to reduce the loans of SOEs and promote the marketization of SOEs as part of their efforts to help non-governmental capital enter more economic sectors and lower the threshold of financing for private enterprises.

Beyond that, another headache for the country’s authorities is how to control the skyrocketing housing prices in some big cities on the one hand, while preventing a housing “bubble” burst on the other.

The latest regulation on the housing market took effect in September 2016, which was further tightened in March this year. However, the housing prices are yet to cool down.

Some analysts are also questioning the effectiveness of such policies on housing market, criticizing the government for being a bit shortsighted in replacing long-term policies with short-term policies.

Meanwhile, some analysts suggest that the government should focus more on the supply-side reform when dealing with the housing market, especially in some big cities where more people have rigid demand for housing.

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