The slowdown in the world's second-largest economy is continuing as China reports first-quarter GDP growth of 6.7% year-on-year. Expansion in the first quarter of 2015 was 7%.
Still, the deceleration is milder than many had feared. "Data from the investment-industry nexus show that the tried and tested stimulus measures of recent months have stirred up the physical part of the economy, especially towards the end of Q1, while consumption remained relatively robust," notes Louis Kuijs, Head of Asia Economics at Oxford Economics.
Services expanded by 7.6%, from 8.3% in the previous quarter, while industry grew 5.8%, faster than the 3.9% in fourth quarter last year.
"This recent improvement in momentum should continue to support the economy in Q2," says Kuijs. "Meanwhile, consumption should remain relatively solid this year." He has revised up his forecast for GDP growth in 2016 to 6.5% from 6.2%, within the government's targeted range.
But Marie Diron, a senior vice president at Moody's Investors Service, warns that the stimulus measures "may further increase longer term imbalances, particularly if they lead to a rapid increase in investment by state-owned enterprises (SOEs) that does not yield benefits in terms of pofitabiity and value added."
SOE investment jumped 23.3% in the first quarter, a "very large increase" that signals a further rise in leverage and fall in return on assets, she adds.
Corporate credit risk
Alicia Garcia Herrero, Asia Pacific Chief Economist for French bank Natixis, flags corporate credit risk as a key concern. The banking sector's non-performing loans amounted to RMB1.274 trillion in Q4 2015. The International Monetary Fund estimates that the potential losses could equal 7% of GDP.
With the fiscal and monetary stimulus gaining steam, banks and the financial sector as a whole will necessarily take on higher corporate credit risk, says Herrero. "The extra room of tier-1 capital that mainland banks have enjoyed could be easily used up in 2016," she warns.
"For the financial system in China to remain safe, banks need to beef up their capital," she concludes.