China's Q1 growth of 6.7 percent was a big relief given how poorly the year started with the first five weeks before Lunar New Year; March's biggest surprise was a tentative but resounding industrial recovery.
On the other hand, the debt jamboree continues: total social financing (TSF) increased by an eye-popping $1 trillion in Q1 (a new record), as money supply (M2) continues to outstrip GDP by 2-to-1 (13.4 versus 6.7 percent growth). That wasn't sustainable in 2012, and it definitely isn't in 2016.
The world will find out in 2016 and 2017 whether or not China is in fact such an "overinvestment" bubble as it's cracked out to be: its per capita GDP of about $8,000 is much lower in real terms than Japan's in the early 1990s, so it could still be too early to make such a direct comparison with the debt deflation that overtook the latter and doomed it to a lost generation. China's clearly malinvested heavily - on a scale never seen before in human history ($6.9 trillion by one unofficial 2014 study) - but ironically this leaves massive demand for actual sound investment unmet in prime sectors and geographic areas (i.e megacities and their environs need more attention relative to second and third-tier cities which must plateau or downsize). One would hope that that's the impetus for the continued heavy investment and delayed deleveraging.
Of course, China remains at the mercy of prevailing global conditions and US monetary policy. Global dollar liquidity - dictated largely by oil and commodity prices - is still too brittle for anyone to be sanguine about an easy recovery. The Fed must weigh its desire to keep global dollar funding conditions accommodative, i.e. delay its rate hike schedule, against its imperative to enforce the discipline of more balanced capital allocation by international economic participants, of which Chinese industry is perhaps the single most important.
In a nutshell, the Fed has given Beijing a reprieve but the latter must now make good on its own end of the bargain: it must stabilize the nascent industrial recovery by pressing ahead with downsizing and restructuring where it's needed, and not allow zombie SOEs to capitalize on the breathing space to perpetuate their bottom-feeding, value-destructive ways. The jury's out on this one until later this year, when the present relative calm in oil and commodity markets will have faded or even dissipated altogether: difficult Chinese decisions now, or conversely more foot-dragging, will cushion or amplify the next wave in the lineage of August-September 2015 and January-February of this year.
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