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China Fails to Break Its Addiction

Walter Russell Mead

The headline in the Wall Street Journal trumpeted the good news for Beijing today: China posted its best quarterly growth figures since 2015, defying the gloomier expectations of economic analysts. Dig even slightly below the surface, however, and the picture is less rosy, showing that China has failed to break its addiction to old-fashioned economic stimulus and real estate:

China reported growth of 6.9% in the first quarter, its fastest pace since the third quarter of 2015, fueled by credit and infrastructure spending as well as a stubbornly booming property market.

The pace was a notch up from the 6.8% expansion in the previous quarter and puts China well ahead of its annual target of about 6.5% growth. […]

But many of the drivers that have powered the recent expansion are expected to falter by the second half of 2017, economists say.

China’s central bank has gradually tightened credit using short-term lending instruments, wary of rapidly rising debt and growing speculation in asset markets. That, along with increased mortgage and purchase restrictions, are expected to weaken the property market in coming months—which accounts for 25% to 30% of China’s economy including related industries, according to DBS—with knock-on effects for construction and raw-material firms.

As ever, when faced with choice between necessary but painful reforms and letting the economy chug ahead on an unsustainable path, China’s leadership flinches. As a result, growth is picking up, but the economy’s weak spots—dependence on high credit, dubious infrastructure investments and the greatest housing bubble in the history of the human race—only get worse.

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