It was less than four months ago that China was sneezing and the rest of the world was catching a cold.
Turmoil in Chinese equities and currency markets in early January spooked investors worldwide. The fear was that policymakers in Beijing were losing control of a slowdown in China’s giant economy, bringing risks to the rest of the globe.
Fast forward to the first-quarter GDP data released Friday, and the news was met with barely a ripple of reaction in the markets. The numbers confirmed that China’s economy has not fallen off a cliff. In fact, it’s stabilizing.
That’s the good news. The bad news is that all the tools that China is using now to underpin economic growth are from a playbook that’s all too familiar.
“This looks like an old-style, credit-backed, investment-driven recovery,” SG Global Economics said in a research note. It noted that the current situation “bears an uncanny resemblance” to the beginning of China’s debt-driven stimulus package during the depths of the global financial crisis.
In other words, one step forward two steps back.
Beijing has clearly avoided the economic hard landing that investors were worrying about in January. But rather than address its economy’s deep-rooted issues through reforms and restructuring, it’s reverted to its old approach of throwing money at the problem.
Take a look at the numbers. In the first quarter, infrastructure spending boomed and credit growth soared.
In March alone, Chinese financial institutions made loans totaling $211 billion, twice as much as the previous month and well ahead of expectations.
That all adds up to a big financial shot in the arm for the economy, with echoes of China’s $600 billion spending spree in 2009 to protect the economy from the downdrafts of the financial crisis emanating from the U.S.
The 2009 effort worked, but not for the long term. The stimulus package left big asset bubbles created by easy money and speculation.
The same could be happening again. Property prices are soaring in major Chinese cities once again. According to property services group Cushman and Wakefield, prices in Shanghai are up a whopping 24% in just the first two months of the year.
Bad loans are piling up at the big state-controlled banks, and officials are warning about high levels of corporate debt.
For how long will Beijing’s new round of efforts succeed in propping up the economy?
In a note to clients, Goldman Sachs says it doubts the “sustainability of the acceleration beyond the next few months”. According to Goldman, there is a “high likelihood” that Chinese economic growth will hit the lower end of the government’s 6.5%-7% target range this year.
SG Global Economics also says the current recovery “will not last very long”.
What’s missing in Beijing’s response to the slowing economy is the commitment to economic reforms that will have a long-term effect of rebalancing the economy.
That means moves like killing off the zombie state-owned enterprises that are kept alive by government handouts while turning out products that nobody wants.
This type of restructuring is painful and will cost millions of jobs if it’s done properly.
But at this stage it appears Beijing does not have the political will to carry them through, preferring instead the old-style pump-priming that provides short-term relief but is not sustainable.