MNI: China Q1 GDP Seen Up 4%, But Demand Weak Into H2-Advisors

China’s economy probably grew by over 4% in the first quarter and could expand by more than 7% in H1 thanks to accommodative monetary policy and public infrastructure investment, but private sector weakness will weigh on activity in the second half without fresh stimulus, policy advisors and researchers told MNI.

Total social financing hit a record CNY5.38 trillion in March, People’s Bank of China data showed, with the broad measure of borrowing expanding by CNY2.47 trillion more in the first quarter than in the same period of last year. But over 60% of this additional borrowing came from the government, particularly for infrastructure spending, according to Zhu He, China Finance 40 Forum senior fellow, who called for the PBOC to cut rates to support growth into H2.

First quarter GDP data due on April 18 will show a rebound to about 4.5% growth in annual terms, up from 2.9% in Q4, said Liu Lei, senior fellow at the National Balance Sheet Research Centre, part of the National Institution for Finance and Development at the China Association of Social Science. This would exceed market expectations for 3.8% growth during the first quarter following the relaxation of Covid-zero restrictions, and Liu said base effects could even push Q2 growth near 10%, taking H1 expansion to over 7%.

But Liu also said a barrage of new PBOC structural lending tools had not flowed properly into the real economy, with some funds remaining in the financial system. The PBOC and finance ministry need to coordinate on fiscal strategy while taking care to avoid fueling financial arbitrage, by making monetary facilities still more targeted, he said.

FLAGGING CONFIDENCE

The government stepped in to boost credit and investment after financial market volatility and falling house prices sapped private confidence, Zhu said. Demand for borrowing has weakened as the spread between returns on assets and private-company funding costs has narrowed to 2% from 7%, while the equivalent household sector spread has turned negative, he said.

But public sector investment is less efficient and contributes less to future growth than private spending, Zhu added, noting that falling revenue from sales of state-owned land mean most publicly-funded infrastructure projects offer less future cash flow.

Fading base effects, soft private credit demand and export weakness mean growth is likely to flag in the second half despite public spending, unless this is supported by prompt PBOC rate cuts, he argued. (See: MNI PBOC WATCH: More RRR Cuts Seen To Keep Liquidity Ample)

Concerns over the sustainability of the strong credit performance surfaced in markets following the release of the total social financing data on April 11, with the yield on 10-year government bonds falling 2 basis points.

SPECULATION

Another sign of sluggish production activity can be seen in the weakness of the M1, a narrower measure of money supply versus the broader M2, said another policy advisor, who asked to remain anonymous. Liquidity is flowing into financial speculation rather than into the real economy, he said, noting that lenders have used borrowed money to buy higher-yielding bonds, while some companies have used cheap loans to invest in higher interest-bearing deposits or wealth management products.

M2 rose by 12/7% y/y in March, while M1 gained only 5.1% (See: MNI BRIEF: China March Total Social Financing, New Loans, Jump) Regulators clamped down on the repo market in March, according to the advisor, but data from Chinese provider Choice shows repo trading volume has continued to rise since the beginning of March, surging to CNY7 trillion on April 6.

At the same time, uncertainty has led non-financial companies and households to boost savings, with bank deposits increasing by CNY15.39 trillion in Q1, CNY4.53 trillion more than the gain in the same period last year.

Negative investor sentiment will also muffle the effects of rate cuts on consumption and investment, the anonymous advisor warned.