HONG KONG (Reuters Breakingviews) - The world’s second-biggest economy may be getting back on track, at least judging by the 35 percent rise in the benchmark CSI300 index .CSI300 so far this year. Growth may have been lacklustre in the first quarter, but stock investors are optimistic, encouraged by an impressive lending rebound. The test will be how long these animal spirits alone can keep momentum going.
China’s first-quarter GDP was up 6.4 percent compared to a year earlier, official data showed on Wednesday. That’s the same rate of growth as the fourth quarter of last year. But look elsewhere, and there is newfound confidence: the Shanghai Composite Index .SSEC has been one of the top-performing global indexes this year.
There are good reasons for the chirpier mood. A deal to end the U.S.-China trade conflict appears on the horizon. Fixed-asset investment in the year to March notched up 6.3 percent year-on-year growth, and policymakers announced tax and fee cuts worth around 2 percent of GDP. Some high-frequency indicators delivered pleasant surprises: factory activity returned to growth last month, according to one purchasing managers’ index.
Perhaps the biggest single factor behind the excitement, however, is lending. After last year’s squeeze to control bad debt, officials let up a bit in the first three months of 2019. The amount of outstanding total social financing, a measure of credit, rose almost 11 percent year-on-year in March. Banks extended 1.69 trillion yuan of net new yuan-denominated loans last month, more than expected. Such disbursements have a delayed impact, meaning an uptick should arrive later in the year.
So far, so good. Wary policymakers appear to have supported growth so far without letting credit rip. They haven’t sunk the budget either.
But it’s unclear what happens if business confidence sags later in the year. Beijing has ever-shrinking space to step in by increasing lending or fiscal support without either blowing past the budget deficit target, or doing an about-turn on hot-button issues like the need to deleverage companies and control property price growth.
Escalating intervention might also raise questions about whether economic growth above 6 percent may simply no longer be possible without ever-increasing dollops of credit. For now, however, policymakers can bask in some warmer sentiment.
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