China: heading for a crunch?

It became obvious early this week how much investors have been counting on China "to haul the global economy out of the mire", says Clarissa Tan on Spectator.co.uk. Assets ranging from metals to Prada shares slumped when China reported a GDP figure for the first quarter that was far weaker than expected. With Europe still in recession and recent US data shaky, that was the last thing they needed.

China's economy grew by 7.7% year-on-year between January and March. Most forecasters had pencilled in 8%. The final quarter of 2012 had seen the first acceleration in annual GDP growth to 7.9% in eight quarters. But the small bounce of recent months already seems to be fading. March data show that the quarter ended badly. Exports, fixed-asset investment and industrial production all decelerated. Retail sales were tepid. Weakness was "broad-based on the domestic front" in the first quarter, says JP Morgan's Zhu Haibin.

The big picture here is that the momentum from the renewed burst of credit-juiced fixed-asset investment, concentrating on property and infrastructure, hasn't spread. "We see fast credit growth but the money stays out of the real economy," says Haibin. There is little sign, says research group Capital Economics, of broad private-sector investment or household spending taking up the baton.

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That suggests that the government would have to loosen property-market controls or allow the credit spigots to open considerably further to give growth a significant fillip. But "neither seems likely" as the authorities already seem concerned that credit and property investment have been growing too fast, says Capital Economics. Hopes of growth accelerating into 2014 "will have taken a big knock".

With the economy fuelled by debt since 2009 overall credit in the economy has jumped by 60% in the past year fears that the debt and housing bubble will come to a sticky end will mount. As debt piles up, the danger of bad loans damaging the banking system rises.

It's interesting to note that, according to Nomura, an asset manager, some of the recent liquidity increase was absorbed by borrowers seeking to service debts rather then make new investments, thus tempering growth. If current trends continue, says Tan, China's financial sector "may well suffer the convulsions that America's did in 2007".