China’s economy has been given a dose of steroids.
Lending in the country has exploded: Chinese banks have extended more loans in the last three months than the entire US corporate-financing market ever has, according to Deutsche Bank.
There have also been several rounds of relaxation in property-purchase regulations, according to Morgan Stanley.
The government has stepped up spending too, with the fiscal spending-to-GDP ratio increasing 2% since March 2015.
That has bolstered slowing sectors in the economy. Year-on-year growth in industrial production picked up to a nine-month high of 6.8% in March, according to Morgan Stanley. Property sales spiked 37.7% year-on-year, according to the bank.
The risk is that the stimulus could wear off pretty quick.
Here is Morgan Stanley on the topic:
We are concerned about the deteriorating quality of the cyclical improvement, as it has been mainly a government-led recovery in investment growth — especially infrastructure and property. The cyclical improvement doesn’t solve the structural problems of high debt, excess capacity and persistent disinflationary pressures.
They expect the current recovery cycle to continue for another three to four months, before a moderation in growth likely August or September.
The analysts aren’t expecting to see the second-largest economy fall into a deep slump, but the current boost to the economy will likely to more harm than good in the long run.
That is because the stimulus-driven growth is creating excess capacity, according to Morgan Stanley, when China actually needs the opposite to be happening.
In addition, it’s getting harder for China to actually generate growth with these types of measures. It took 6.4 units of new debt to generate one unit of nominal GDP in 2015, versus 4.2 in 2014.
Another way of looking at this is that the economy needs a higher dose of steroids now than it did in the past. That doesn’t bode well for the long-run.