BEIJING – China's recovery from its slowest year of economic growth since 1999 likely accelerated in the first three months of 2013, fuelled by a credit boom that could quickly be thrown into reverse if property speculation and inflation gather pace.
A double-digit rise in bank lending and a surge in total credit in the economy in the first three months of the year, together with forecast-busting import growth in March, have set analysts thinking the economy is expanding faster than expected and policymakers may have to act to restrain it.
"We're expecting 8.1 percent growth in Q1 and as it looks like things are getting better not worse in the global economy, I think things will continue to improve from there," Tim Condon, Asian economic research chief at ING in Singapore, told Reuters.
Official data is expected to show annual growth in the world's second-biggest economy hit 8.0 percent in the first quarter, according to the consensus forecast in the benchmark Reuters poll, its best year-on-year showing since first-quarter 2012.
"But bank loan numbers are running too fast to be consistent with monetary stability and in particular to deliver a cooling of the housing market that the government says it wants," noted Condon. "They are going to have to tighten up."
Chinese banks made 1.06 trillion yuan ($171.2 billion) of new local currency loans in March, official data showed last week, a 12 percent year-on-year rise and well above market forecasts -- evidence of an economic recovery fuelled by credit.
Total Social Financing, the central bank's broad measure of liquidity, surged to 2.4 trillion yuan in March, more than doubling February's 1.07 trillion yuan. This unexpected torrent of money raised red flags on inflation and asset price speculation -- particularly in the housing market.
China's Communist Party stakes its right to rule on the affordability of food and decent housing. That makes it acutely sensitive to complaints from a still mainly poor 1.3 billion populace who protest that inflation makes basic necessities unaffordable, while a new urban consumer class grumbles that city-center property is getting out of reach.
Inflation was relatively restrained in the first quarter, easing from a nine-month high in February to 2.1 percent year-on-year in March, well below the government's 3.5 percent 2013 ceiling.
But home prices are frothy. Average new home prices in 70 major cities climbed 2.1 percent year-on-year in February and were in double digits on a weighted basis in many, forcing the government to launch a new round of measures to cool them.
"China's monetary policymakers are in a tough position: To balance short-term growth stability, market worries, and long-term economic health," Ting Lu, chief China economist at Bank of America/Merrill Lynch, wrote in a note to clients.
Analysts at China International Capital Corp. calculate property sales will contribute about 1 percentage point more to growth in first quarter 2013 than the fourth quarter of last year.
The economy's downside risks are tied to real estate, investment in which made up 13.8 percent of GDP in 2012, and directly affects around 40 business sectors. Construction drove a rise in services sector activity in March.
Data on first quarter fixed asset investment (FAI), closely tied to real estate transactions and also due on Monday, is forecast to have expanded at an annual pace of 21.3 percent.
It will be published alongside March numbers for industrial production and retail sales which are expected to show double- digit annual growth, in line with February's figures.
FAI has seen a steady upswing since mid-2012 when Beijing began to take action to boost an economy hit by faltering demand for exports in China's two biggest foreign markets, the European Union and the United States.
That investment has added considerable momentum to overall economic activity and domestic demand, clearly seen in the March import data.
Iron ore imports jumped 14.4 percent in March from February to feed steel mills anticipating a further domestic demand drive. A year-on-year improvement in imports for domestic use of 4.8 percent reversed a fall of 2.3 percent in January-February.
Taken together, these factors show an economy running hotter than forecast thanks to a short-term infusion of credit-led infrastructure spending, and nearing the point at which policy settings are tightened markedly.
"We maintain our Q1 GDP growth forecast of 8.2 percent year-on-year, as tertiary (services) sector growth likely improved, driven by a rebound in the housing sector. Nonetheless, we acknowledge that there are downside risks to our GDP growth forecast," said Zhang Zhiwei, chief China economist at Nomura in Hong Kong.
"The recovery is weak and not sustainable and we continue to expect policy tightening to reduce growth significantly to 7.3 percent in the second half," Zhang wrote in a note to clients. "Indeed, we think that the loose policy stance in Q1 has increased the likelihood of more policy tightening ahead."
(Editing by Eric Meijer)