CBA thinks China’s debt and investment-led recovery is unlikely to last more than six months

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Chinese economic data released in March surprised many with its resilience. Trade, purchasing managers indices (PMIs), retail sales, industrial output, credit growth and fixed asset investment, among others, all topped expectations, leading many to assume the acceleration signalled the start of a broader economic rebound.

Optimism towards the economy improved sharply, leading many analysts to upgrade their expectations for growth in the year ahead. Financial markets also welcomed the news, piling into pretty much any asset class linked to the performance of the Chinese economy.

However, extrapolating one set of figures does have its dangers. As the saying goes, one month does not make a trend.

Wei Li, CBA’s China and Asia economist, is one analyst who doesn’t believe the figures will herald the start of the longer-term trend, suggesting instead that the stimulus-backed economic rebound is unlikely to last.

“It is clear that the recent recovery in China is acquired at the cost of exacerbating China’s already large structural issues,” says Li. “Arguably, Beijing is reversing away from economic rebalancing, back to the old growth model that relies on state-directed bank loans and investment to drive growth”.

Li is not alone. While new lending in China is front-loaded at the start of each year, the credit splurge seen in the March quarter was unprecedented, and a somewhat panicky response to faltering economic growth.

As a result of policymakers hitting the panic button, Chinese debt-to-GDP levels rose to another record high, helping to spur on property investment despite years of unsold inventory.

“China’s total debt rose by another 8 percentage points in Q1 2016, to 244% of GDP, from 236% at end 2015,” says Li.

“Housing investment picked up again while there is already an overhang of inventory in the market – the aggregate housing inventory is as high as 52 months’ worth of sales.”

As for the rebound in industrial activity seen in March, Li believes the strength may not be all that it seems.

“The sharp acceleration in China’s industrial production in March was largely an one-off technical effect, in our view, possibly caused by seasonality or survey sample adjustment,” he notes.

Li suggests that the “current debt and investment-led economic recovery is unlikely to last more than six months”, making him less optimistic than others when it comes to the outlook for economic growth.

“We are more cautious, expecting growth in China to moderate again in H2. We keep our GDP growth forecast unchanged at 6.5% in 2016 at this point.”