Overnight China reported a barrage of economic data for March and Q1, that not only showed the first back to back GDP acceleration in seven years, but beat across the board as investment picked up, retail sales rebounded and factory output strengthened, following record credit growth and a fresh rebound in China's property markets which defy Beijing's attempts to taper the country's newest housing bubble.

The Q1 data highlights:

  • GDP rose 6.9%, above the 6.8% expected, and higher than the 6.8% in Q4
  • Fixed-asset investment rose 9.2% y/y, up from 8.1%, and higher than the 8.8% estimate, and in line with the highest forecast among 35 economists
  • Industrial Production rose 7.6% y/y in March; also well above the estimated 6.3% gain, and higher than the highest forecast of 6.5% among 37 economists polled
  • Retail sales rose 10.9% y/y in March; beating estimates of 9.7%

"Growth remained strong on the back of continued strength in housing activity, resilient infrastructure investment, and better external demand," said Robin Xing, chief China economist at Morgan Stanley in Hong Kong. "The strong growth and better external demand has provided room for a faster pace of countercyclical monetary policy tightening."

In current-price terms, the economy expanded 11.8% from a year earlier, according to Bloomberg estimates. "That’s making the problem of excess leverage look a little more manageable – at least as long as factory reflation stays strong," BI economists Tom Orlik and Fielding Chen wrote in a report. Of note: the GDP internals pointed to further rebalancing away from the old industrial growth drivers. Consumption reportedly contributed 77.2% to growth in the first quarter, an NBS spokesman said at a briefing in Beijing. Last year, 64.6% of growth came from consumption, although one traditionally takes such goalseeked breakdowns with a grain of salt.

The Q1 expansion validated China's recent rebound as producer prices have soared, resulting in the ongoing global "reflation" trade, as industrial output picked up courtesy of soaring credit. Still, one measure of consumer earnings slowed. Growth of median per-capita disposable income decelerated to 6.7% in the first quarter, down from 8.3% last year and slower than GDP expansion for the first time since NBS began releasing the gauge in March 2014.

"The rebound in retail sales growth was particularly important as it indicates that consumer spending remains strong," said Rajiv Biswas, Asia-Pacific chief economist at IHS Markit in Singapore. "The upturn in Chinese growth is a very positive indicator for the Asia Pacific and world growth in 2017, as well as underpinning the near-term outlook for global commodities."

Quoted by Bloomberg, Raymond Yeung, chief greater China economist at Australia & New Zealand Banking Group Ltd. in Hong Kong said "for the first time in the recent years, China starts a year with a strong headline GDP. Thanks to strong investment and property, the economy is performing well."

"The first quarter growth is mainly driven by reflation and very strong property sales and investment," said Larry Hu, head of China economics at Macquarie Securities Ltd. in Hong Kong. "This strong data would give more confidence to maintain a tightening stance."

Additionally, the labor market has been holding up too: The surveyed jobless rate fell in March from February, while the level in big cities was below 5 percent at end of last month, the NBS said. China said it added 3.34 million new jobs in the first quarter.

Other notable data releases overnight from China:

  • China produced a record quantity of steel in March as production of crude steel expanded 1.8 percent from a year earlier
  • Coal production rebounded in March after the government said it doesn’t intend to reintroduce widespread restrictions this year as long as prices remain acceptable to regulators
  • Oil production stagnated in the first quarter, averaging 3.91 million barrels a day
  • Investment in property development rose 9.1 percent in the first three months from a year earlier, compared with 8.9 percent in the first two months and 6.9 percent in 2016. Yet developers may find 2017 more challenging, as about a dozen cities have imposed tighter restrictions on purchases to curb a frenzy of speculation.

As Bloomberg adds, forecasters responded to the data by raising full-year growth estimates. Zhu Haibin, an economist at JPMorgan Chase & Co. in Hong Kong, boosted his to 6.7% from 6.6%, citing expectations for "solid growth momentum for the rest of the year." Nomura Holdings Inc. analysts Yang Zhao and Wendy Chen raised their projection to 6.7 percent from 6.5 percent.

Despite recent property tightening measures, investment momentum is likely to stay strong in coming months amid heavy infrastructure investment. The April 1 announcement of the new Xiongan economic zone portends massive construction spending and suggests authorities are likely to remain reliant on investment to help support longer-term growth.

However, for all the rhetoric just one key variable mattered: China's relentless credit pump. As reported on Friday, the broadest measure of new credit rose more than estimated last month amid strong growth in shadow banking. Aggregate financing grew 2.12 trillion yuan ($308 billion). Furthermore, for the first quarter, total social financing reached a new record high 6.93 trillion yuan - equivalent to the size of Mexico's economy - and well above last year's first quarter total. At today's Yuan exchange rate, China's credit creation in Q1 amounted to just over 1 trillion US dollars.

 

While the economic data was a welcome offset to this unprecedented credit boom, concerns continue to mount that with China's growth primarily a function of relentless credit expansion it is only a matter of time before this debt-fueled model breaks and the world's growth dynamo suffers a cardiac arrest.