Economy strong start faces risks at home and abroad

China’s crackdown on financial risks and trade tensions with the U.S. threaten to undermine a stronger-than-expected start to the year for the world’s second-largest economy.

Factory output and investment in fixed assets exceeded economists’ expectations in the first two months of this year, climbing 7.2 percent and 7.9 percent respectively from a year earlier as Chinese exports surged. Retail sales also remained robust, statistics bureau data – combined for January and February to smooth effects from the Lunar New Year holiday – showed yesterday.

While the numbers paint a picture of an economy reaping the rewards of a revival in global demand, challenges loom. Chinese policy makers meeting this month have intensified plans to purge debt risk and tighten the fiscal screws by cutting the targeted budget deficit. Externally, the sudden ouster of U.S. Secretary of State Rex Tillerson raises odds President Donald Trump takes a harder line on China given the huge trade surplus, his No. 1 target.

“At the moment, U.S. growth, European growth, global growth are very strong,” Wang Tao, chief China economist at UBS Group AG in Hong Kong, told Bloomberg Television yesterday. “We’re a bit wary that deleveraging will drive credit growth and therefore GDP growth a bit slower for the rest of the year. Tariffs from the U.S. are definitely a rising risk.”

A key risk is if China tightens controls on local government debt more severely, causing a sharper slowdown in infrastructure investment, she said.

The China gross domestic product tracker by Bloomberg Economics decelerated to 6.84 percent in February from 7.28 percent in January.

There’s also the prospect such strong data could contribute to higher borrowing costs, particularly as global counterparts like the Federal Reserve continue to normalize rates.

“The economy will struggle to maintain this pace of growth as headwinds from China’s tightening monetary policy mount,” said William Adams, senior international economist at PNC Financial Services Group Inc. in Pittsburgh who previously worked for the Conference Board in Beijing. “Fiscal policy is also becoming less supportive of growth, compounding the headwinds from tighter credit and monetary policy.”

The economic impact of U.S. trade levies will probably be limited, with Trump likely to stop short of a blanket tariff on a broad set of Chinese exports, Wang said. Still, Tillerson’s firing has raised concerns that a new guard in the White House will advance Trump’s agenda of ramping up tariffs on key trading partners. Trump nominated CIA Director Mike Pompeo, who has endorsed “pushing back against the Chinese threat,” to replace Tillerson.

Trump last week signed an order to impose a 25 percent duty on steel imports into the U.S., and 10 percent on aluminum. He also warned more tariffs are coming.

While demand from outside China remains intact, there are signs it’s softening domestically, with cement prices falling since the beginning of the year and slower excavator sales growth, Larry Hu, chief China economist at Macquarie Securities Ltd. in Hong Kong, wrote in a note. He said strength in the first two months may be the “peak for the year.”

Despite the stronger-than-expected data, economists see Chinese growth moderating this year after accelerating in 2017. Policy makers at the annual National People’s Congress this month stepped up plans to curb debt risk while cutting the budget deficit target and setting a 6.5 percent growth goal that omitted last year’s aim for a faster pace if possible. Yet amid rising trade tensions, exports have remained robust.

Delegates also have undertaken a sweeping reorganization of government, scrapping term limits for President Xi Jinping and giving the central bank power to write financial sector rules. They vote Monday to appoint a People’s Bank of China governor.

Yesterday’s data showed home sales growth slowed amid an almost two-year campaign to cool the market. Property development investment rose 9.9 percent on-year. Bloomberg