Reliance on credit growth is a risky strategy for China

THE global stockmarket rout that started in January was widely attributed to financial problems in China. The rout has since moderated, if not fully subsided. But the problems in China remain, and are likely to be with us for awhile yet.

China's economy is slowing but, going by official numbers at least, the slowdown has been gentle. In the first quarter, growth came in at 6.7 per cent, almost exactly on target, which has been officially set at 6.5 to 7 per cent this year, compared to actual growth of 6.9 per cent for the whole of 2015 and 7.3 per cent in 2014. But the eyebrow-raising story during the first quarter was that despite the economic slowdown and record levels of corporate debt, credit growth has been explosive. Data from Bloomberg indicate new credits rose by a record 4.6 trillion yuan (S$955 billion) during the first three months of 2016, way above what they were even during the depths of the global financial crisis in 2009.

It is clear then that growth, rather than economic restructuring, is the priority of the moment for China's government; indeed it was at the National People's Congress in March that the growth target was first announced. Many observers thought it to be unrealistically high given the dire need for deleveraging and restructuring, but it would seem that the authorities are serious about trying to achieve it.