There’s a dangerous bubble growing in China’s economy

China might be growing itself right into a bubble.

Based on Friday’s GDP report, which came in at 6.7% for the first quarter, it seemed that the country is growing at the pace many expected (depending on what you think of the country’s statistics).

The problem, however, wasn’t the headline number but instead the way that the country grew, according to Wei Yao and Claire Huang at Societe Generale.

“This looks like an old-styled credit-backed investment-driven recovery, which bears an uncanny resemblance to the beginning of the ‘four trillion stimulus’ package in 2009,” the economists wrote in a note Friday. “The consequence of that stimulus was inflation, asset bubbles and excess capacity.”

The problems, as Huang and Yao see it, is that the growth being produced currently are in older, industrial sectors rather than consumption growth.

As we’ve noted, China is attempting to make the transition from a manufacturing-based economy to a consumption and services-based one. The GDP report shows that’s not going so well.

“March investment, production and credit data delivered very sizable upside surprises. Only consumption barely improved,” said the note.

As the economists noted, there was a huge increase in housing starts in the country during the quarter, meaning that the country is going back to old habits of real estate building for growth instead of shifting to the new economy.

The further problem, and what could lead to serious issues in the country’s future, is the underlying credit data from the report.

“In our view, the most obvious underlying factor behind this recovery is credit,” wrote Huang and Yao.

“In Q1, increases in total credit exploded to 7.5 trillion Chinese yuan, up 58% [year over year] and equivalent to 46.5% of nominal GDP – one of the highest ratios ever. Credit growth accelerated to 15.8% yoy to end-March, the quickest pace in 20 months.”

Screen Shot 2016 04 15 at 9.56.49 AM

According to the data, credit is up across the board. The problem is, by depending on credit growth and industrial production the country is falling into a predictable, but not sustainable, pattern.

“There is no bigger policy lever than this kind of credit injection,” wrote Huang and Yao.

“The Chinese government was clearly giving growth all the attention in Q1, and now the question is how long it will maintain this undoubtedly unsustainable model. Surging home prices seem a sign of emerging asset bubbles, and if this credit push were to continue, there would be more dangers, including risks of capital outflows and currency devaluation.”

It appears that relying on credit and old industry isn’t sustainable and a fall is on the way.

So basically, watch out.

NOW WATCH: A psychologist reveals a trick to stop being lazy