China's economy grows at 6.7% but experts warn of 'unsustainable' bubble

'Amazing what a housing bubble and crazy debt increases can achieve,” says Michael Every, head of financial markets research at Rabobank in Hong Kong

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The Independent Online

China’s economic growth remained stable in the third quarter, all but ensuring the government’s full-year growth target is met and opening a window for policy makers to deliver on vows to rein in excessive credit and surging property prices.

“It’s amazing what a housing bubble and crazy debt increases can achieve,” said Michael Every, head of financial markets research at Rabobank in Hong Kong. “This is not sustainable – but then the alternative is nothing anyone wants to think about.”

Gross domestic product rose 6.7 per cent in the third quarter from a year earlier, matching the median projection by economists surveyed by Bloomberg, and smack in the middle of the government’s 2016 goal of 6.5 per cent to 7 per cent growth. Services industries paced the expansion in the first nine months of the year, expanding 7.6 per cent.

Stabilizing growth gives room for policies aimed at containing swelling leverage and curbing excessive financial risks, with IMF researchers among those calling for such efforts. The government released guidelines last week for reducing debt, yet past pledges have often been ignored as rampant credit growth fuels surging house prices in the nation’s biggest cities.


Releases for September showed the continuing shift in China’s economy toward consumer spending, with retail sales gains outpacing the rise in industrial production. Investment spending continues to be led by the public sector, the figures showed, with subdued private business spending highlighting the problem of high levels of debt.

September data showed:

Industrial output rose 6.1 per cent from a year earlier, against the median forecast for 6.4 per cent Retail sales gained 10.7 per cent, matching the median forecast Fixed-asset investment increased 8.2 per cent for January through September, matching the forecast. State firms drove the gain, with a 21.1 per cent jump in investment, while private investment advanced 2.5 per cent The fiscal deficit doubled in September to 861 billion yuan ($128 billion) from a month earlier as the government moved to support growth

“Despite continued disappointing growth in the rest of the world economy, China’s economy is on track to achieve the government’s indicative growth targets for the year,“ said Bert Hofman, the World Bank’s director for China, Mongolia and Korea in Beijing. ”With projected continued modest growth in the rest of the world, the question is what the right balance is between support for demand growth, rising risks from growing leverage and the pace of structural reforms to improve productivity.”

China’s broadest measure of new credit exceeded estimates in September, data released Tuesday showed, underscoring escalating concerns over a property binge and the pace of debt expansion.


Property Boom

Property developers seem to have taken heart from surging prices in major cities, with completed investment in real estate development rising at a 5.8 per cent pace in the first nine months of the year. But they appear positively restrained when compared with the market for apartments: the value of China’s new home sales rose 61 per cent in September from a year earlier, defying policy makers’ moves to cool the boom.

Policy has already begun to shift focus away from stimulus toward controlling financial risks, said Bloomberg Intelligence economists Tom Orlik and Fielding Chen.

“Deleveraging so far has been a goal more discussed than delivered,” the analysts wrote. “With growth firmly on track, and credit expansion surprising on the upside in August and September, the big question for the fourth quarter is whether rhetorical commitments start translating into real action.”

At least 21 cities have introduced purchase restrictions and toughened mortgage lending since late September, reversing two years of easing to support home buyers. Goldman Sachs has said more tightening is likely to follow if prices keep soaring, while Citigroup Inc. estimates shrinking demand may lead sales volume to contract in the fourth quarter.

The economy maintained expansion of about 7.1 per cent in September, according to a Bloomberg Intelligence monthly growth gauge. China’s steel mills have meanwhile clicked into a higher gear, with production climbing from a year earlier as the property boom drives domestic demand.

Shares in Shanghai and the yuan were little changed.

Wednesday’s reports also showed further evidence of diminishing disinflationary pressures in the world’s No. 2 economy, with the GDP deflator — a broad measure of costs — rising 0.74 per cent for the first nine months of the year, the quickest pace since 2014. That comes on top of figures last week that showed the first gain in factory-gate prices in China since 2012.

“Economic activity seems to be holding up reasonably well, with few signs that a renewed slowdown is just around the corner,” said Julian Evans-Pritchard, an economist at Capital Economics in Singapore, “Nonetheless, the recent recovery is ultimately on borrowed time given that it has been driven in large part by faster credit growth and a property market boom, both of which policy makers are now working to rein in.”