April 18, 2017 4:43 pm JST

Does China's strong Q1 growth point to a slowdown?

Analysts expect economy to lose steam in second half of 2017

KEIICHIRO MORIYASU, NQN staff writer

HONG KONG -- China kicked off the year with better-than-expected economic growth in the first quarter, but it may be too early to celebrate the world's second-largest economy reaching beyond the government's target for 2017. Beijing could have pumped up growth to prepare for the economic slowdown expected in the second half of the year, while at the same time reining in the red-hot housing market to prevent a bubble.

According to the country's National Bureau of Statistics, the economy expanded at 6.9% from a year ago during the three months ended in March. The figure was beyond what the market expected and also Beijing's official target of "around 6.5%."

The unexpectedly robust growth was largely boosted by infrastructure investment and the housing market. In fixed asset investment during the quarter, growth in spending on roads and railways marked a 23.5% increase from a year ago, while floor space of buildings sold and total sales continued to grow strongly at 19.5% and 25.1%, respectively.

Spending policy

However, it is worth noting that public investment is fundamentally Beijing's economic policy. The fast growth seen in fiscal expenditure, according to a report by Goldman Sachs economists including MK Tang and Yu Song, "indicates front loading of fiscal expenditure and is possibly related to the directive from the central government." They added that "this particular contributor to strong growth is most likely just temporary as fiscal expenditure is unlikely to maintain the pace of growth it had in March."

Instead of looking at public investments, analysts point out, it is more important to examine the housing market to gauge the persistence and effectiveness of economic growth.

"To call the housing market the single most important driver of the Chinese economy is no exaggeration," noted Amy Yuan Zhuang, chief Asia analyst at Swedish bank Nordea in a report on Monday. "Last year's recovery in housing sales and construction activity has positively affected many sectors in the economy." She added that the manufacturing sector, especially the heavy segment, has benefited the most.

This is reflected in China's better-than-expected industrial production and consumption in the first quarter. In addition to smartphones and the automobile industry, construction-related industries, including steel, non-ferrous metals and sheet glass, all enjoyed expansion.

China's consumption activity was supported by increasing housing prices. Nordea estimates that last year's 19% increase in housing prices across the nation resulted in a wealth increase of more than 38,000 yuan ($5,516) per head, which is 1.6 times the per capita annual disposable income. The positive influence of expansion in disposable income spilled over to many areas, including retail, communications equipment, furniture, home appliances, beverages and food in March, resulting in double-digit growth.

However, many economists expect this upward moment of economic growth to be short-lived. Aidan Yao, senior emerging Asia economist at AXA Investment Manager, said, "Policy tightening in the housing market and interbank market will slow the economy in the second half" of the year. He made the comment in a joint survey recently conducted by The Nikkei and Nikkei Quick News.

Tighter regulations

Premier Li Keqiang last month said, "We must be fully alert to the build-up of [financial] risks," while paying close attention to a possible housing bubble. Local governments have been implementing tighter regulations on the housing market since last fall, while the People's Bank of China, the nation's central bank, also turning away from an overly easy monetary policy. The PBoC said that new loans by domestic banks declined in March, a result of Beijing's stance to rein in risky loans at a lower level in order to prevent the economy from drifting before the Communist Party's 19th national congress this fall.

In fact, the recovery in the Chinese economy has already started to show signs of slowing. The first quarter's economic growth declined 0.4 percentage point from the quarter before to grow at 1.3%. Average growth forecasts for 2017 among 26 China economists surveyed by The Nikkei and Nikkei Quick News came in at 6.5%, the same level as the official target, suggesting that many expect a slowdown in the second half, which will offset a robust kick-start of the Chinese economy.

Investors were not so much affected by the better-than-expected China's gross domestic product figure. As Yoshinori Hamasaki, chief representative at Okasan Securities' Shanghai office, said, "Investors remain concerned that the authority will further tighten the red-hot property market."

Nikkei staff writer Mariko Tai in Hong Kong contributed to this story.

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