3 Reasons Behind China’s Economic Growth

The Chinese economy recently witnessed the slowest growth in more than 2 decades. Notorious for manipulating numbers, the Chinese authorities could not hide sluggish growth this year. However, the second largest economy of the world has more cards up its sleeve. In the first quarter of 2017, the economy grew at an exceptional rate of 6.9 percent. This is the highest rate in the past 6 quarters, surpassing March forecasts. Here are three catalysts that will be driving China’s economic growth a notch higher.

China’s Economic Growth

Government Expenditure

 

The recent growth in the Chinese economy can be attributed to government stimulus. The authorities have spent on infrastructure development to sustain growth in the long term. Both the central and local governments spent 21 percent more on infrastructure year-over-year. Because of this, the growth figure of 6.9 percent notably defied the government’s own guideline of 6.5 percent. It also crossed the economists’ forecasts of 6.8 percent. Even though economic activity will decrease later in the year, government stimulus will continue to fuel growth. The economy will likely reach its annual growth targets because of big budget spending.

Industrial Output

 

Real estate and infrastructure have helped in driving the growth of the economy. Investment in fixed assets has improved by 9.2 percent. New construction is rapidly enhancing as real estate investment reaches 9.1 percent. Rising home prices have been troubling the Chinese for long and new construction could help in cooling the market. Though the growth in services sector is still weak, industrial output has increased. In heavy industries, a supply-side consolidation coupled with value-added growth has added to the first quarter growth figures. Steel prices have fallen as output has outpaced demand. Still, better production numbers have contributed in better economic figures.

Why Tighter Policies Have Boosted China’s Economic Growth

 

China’s ultra-loose monetary policy is now being replaced by tighter reforms. A leadership change later this year is set to bring major changes to the economy. The authorities are focusing on tighter policies to help offset the risks of major political changes on the economy. Short-term interest rates have been raises multiple times this year and several more will follow. If the US rates continue to rise, China will also raise rates moderately to offset capital outflows.

The first quarter’s numbers were a surprise for most economists as they expected slower growth. However, growth seems to be accelerating in China. This has increased uncertainty regarding the economy’s future. It is only a matter of time when cracks begin to appear and the economy faces another slowdown.