HONG KONG: China's doped economy is low on happy pills. The country reported 6.7 percent year-on-year GDP growth for the three months ending in September, rounding off three eerily consistent quarters.
But the results were medicated by housing speculation, government spending and the Fed's rate caution. As painkillers wear off, the economy's legs will wobble.
Data released in October showed an economy propped up on its feet. As well as GDP growth that matched the exact previous two quarterly readings, credit creation blew past expectations, with new yuan loans coming in at 1.2 trillion yuan in September, while entrenched producer price deflation turned to inflation for the first time since 2012.
In fact the recovery was front-loaded, driven by explosive growth in housing prices and investment that the government is already moving to curtail.
It was buttressed by state firms' investment in fixed assets, up over 20 percent in the first nine months, which is weighing down Chinese bank balance sheets and aggravating trading partners awaiting overcapacity cuts.
And both trends were enabled by a stable interest rate environment and currency that may not endure the next rate hike from the US Federal Reserve.
What's missing is a sustained revival in domestic or internal demand, as illustrated by a surprise decline in both imports and exports in September. Private fixed-asset investment is up a paltry 2.5 percent year-to-date.
The dominance of state investment has also sabotaged the central government's efforts to reform and deleverage its state-owned industrial giants.
As the government makes necessary moves to discourage excessive real estate speculation, that market's amazing ability to drive downstream demand for nearly everything - including the land sales that drive local government revenue - will weaken.
Indeed, there are signs this is already underway: although property investment remained healthy, new construction starts tanked nearly 20 percent in September according to Reuters calculations.
The outcome will unlikely be tranquil. Regulators tried to cool off property in 2014 and arguably produced the very slump China is still trying to crawl out of.
If housing corrects, and the Fed hikes, the lack of good investment alternatives will cause Chinese capital outflows to accelerate, and the government may tighten capital controls. Cold turkey is no fun at all.
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