By Alexandra Stevenson
China’s already sluggish economy slowed even more in the first three months of the year, new data shows, underscoring the urgency behind Beijing’s push to flood the country’s financial system with new loans meant to get growth back on track.
Officials reported Wednesday that the Chinese economy, the world’s second largest, grew 6.4% in the year’s first quarter compared with the same period in 2018. That was slower than the second half of last year, when shoppers pared back, the stock market slumped and private businesses pleaded for help.
Not all of the results were grim, and many economists believe China is on the verge of gaining momentum. Other figures suggest consumer confidence is rising, factory output is ticking up and the world, after several tough months, is buying more Chinese goods. Beijing needs such hopeful signs as it tries to reach a trade deal with the Trump administration while under pressure to lift conditions at home.
There is a caveat: The signs of improvement most likely do not stem from a sudden burst of confidence in the strength of the country’s economy among Chinese business leaders.
Instead, the positive glimmers are largely a product of the hundreds of billions of dollars that Beijing has pumped into the country’s economy in recent months and the loans that officials have pressed state-run banks to make. All of that comes at a cost, and raises a question about how willing Beijing is to spend to keep growth going.
“This time they used an overwhelming amount of force to boost the economy,” said Larry Hu, chief China economist at Macquarie Group. “That is why the economy stabilized in the first quarter.”
The chance of a “double dip,” in which growth drops again before picking up later this year, is high, Hu added. “The recovery is not that solid,” he said. “They front-loaded the policy firepower at the start of the year.”
In many ways, China’s policymakers are reverting to an earlier approach: doling out more loans in exchange for a short-term increase in confidence. The strategy helped keep growth surging over the past decade, even after the 2008 global financial crisis. But it left the country awash in debt that threatens to hamper the economy in the years ahead.
In the early years of China’s boom, companies and local governments could borrow liberally knowing that accelerating growth could help ensure that their gambles paid off. Now that the country’s economy is huge and maturing, it has become increasingly difficult for China to simply grow its way out of its debt.
“China already is in the midst of the largest credit bubble the world has ever seen,” said Victor Shih, an associate professor at the University of California, San Diego. And, Shih added, the Chinese government has not been able to wean itself off its debt habit.
“The government simply cannot afford to think about the medium term and must focus on short-term continuation of the credit bubble,” he said.
The latest round of financial largesse — more than $2 trillion — was remarkable in size and scale, economists said.
The broadest measure of new borrowing in China, known as total social financing, jumped to $1.2 trillion in the first quarter, while bank lending hit a record high of $865 billion, according to Hu at Macquarie Group.
Local governments, prompted by the central government, raised $100 billion in new money through special bonds compared with $11.5 billion in the first quarter of last year, when the same local governments were scolded for borrowing too much and hiding their debt.
On Tuesday, the Organization for Economic Cooperation and Development warned of the potential hazards of such heavy borrowing, saying it could yield bigger economic imbalances in the future. The organization revised its outlook for China’s growth to 6.2 per cent for this year and 6 per cent for 2020, citing the heightened risks of a housing collapse and growing geopolitical tensions.
Even as it struggles through an economic slowdown, China is a “major driver of world economic growth,” Ludger Schuknecht, the organization’s deputy secretary general, said in a report.
“Yet China is at a crossroads, facing serious domestic and external challenges to maintaining its strong position over the long term,” Schuknecht said. The organization also warned that the country’s trade war with the United States would weigh on exports and overall growth.
As it searches for engines to power growth globally, the world needs China to pull through economically. Last year, Beijing reported that growth had softened to its slowest pace since 1990 amid mounting signs that the trade war was already beginning to take a toll, spooking investors. New export orders dropped to multiyear lows, prompting factories to cut overtime and send workers home early before the Chinese holiday season.
Companies appeared to have more resources to hire and expand in the first three months of the year. Some of this was the result of a pledge last year by the central bank to pump $175 billion into the system, mostly to help small and midsize companies.
Although the data remains weak for manufacturers, the sector saw a double-digit jump in revenue in the first three months of the year compared with the last quarter of 2018, according to the economic consulting firm China Beige Book.
Making deep cuts to corporate taxes is among the new policies Beijing hopes will stimulate economic activity. The State Council has announced a series of such cuts that are expected to free up $300 billion to help jump-start the economy.
If its current measures do not work, Beijing could try more unconventional policies to stimulate sectors like the property market.
The sector, which by some measures accounts for up to 30 percent of China’s economic growth, is saddled with too many unsold apartments and too many unfinished projects. The slowdown in property sales and the glut of empty apartments — 65 million units, according to one estimate — have started to worry economists. Property new starts this year are down from the same period last year. Land sales also dropped in the first quarter, and could continue to fall.
Chinese officials have said they have a handle on what they see as a modest slowdown. Economists say the government still needs to get the debt problem fully under control.
“This rally didn’t appear out of nowhere,” analysts at China Beige Book wrote, “and there are at least three compelling reasons to doubt its staying power: credit, credit and credit.”