19 Oct 2020 21:28 IST

China’s headline recovery hides uglier subtext

Cheap credit flowing into stocks and housing may prompt policymakers to tap the brakes on stimulus

China’s gross domestic product rose 4.9 per cent year-on-year last quarter, slightly missing expectations but still music to the ears of policymakers worried about unemployment and souring loans. Beijing has already signalled it might tap the brakes on monetary easing as the economy warms, and this could accelerate the process.

The People’s Bank of China can extrapolate a lot of optimism from recent data. Besides GDP, September sub-indicators including industrial output were better than expected, while loan and bond issuance set records. Retail sales, a soft patch so far as consumers clutched their wallets, beat expectations to grow 3.3 per cent. That in turn supported imports, which popped 13 per cent. With domestic travel reviving and people going back to the movies, the recovery seems to be increasingly broad-based. Last week the PBOC hinted it may start normalising policies given a brighter economic outlook.

Even so, there’s a stimulus overhang to worry about. Too much has depended on state-driven industrial activity, credit-fuelled land sales, and a construction binge. Leverage among non-financial entities rose 20 percentage points in the first half to 266 per cent of output, the biggest spike since the global financial crisis, according to China’s National Institution for Finance & Development. That has selectively supported property speculation and boosted equities; China’s margin trading balance now stands at 1.5 trillion yuan ($224 billion), according to Refinitiv data, its highest level since the crash of 2015.

But the rebound has been unevenly distributed. While bank loans hit a record $2.4 trillion in the first nine months, demand is drying up in the hinterland. Total credit growth was negative in the north-eastern rustbelt province of Liaoning in the first half, according to an analysis by the Rhodium Group, and several provinces are struggling to cover interest payments on outstanding debt.

At the same time infrastructure investment that poorer provinces relied on heavily to produce growth has shown signs of fatigue, and their fiscal condition has worsened. Despite heavy municipal bond issuance, local fiscal spending was still down 1.7 per cent for the year as of August, compared to a rise of 8.8 per cent over the same period in 2019. Private fixed-asset investment remains negative in the first nine months. Withdrawing stimulus early could worsen imbalances aggravated by the pandemic.