China’s macroeconomic data in the first quarter broadly presented a picture of stabilization in the economy, with y/y GDP growth softening only modestly to 6.7% y/y, but recovering sectors appeared limited to an increasingly frothy property market and credit-fueled investment. The longer-term trend of service sector expansion remained intact, even after a softening contribution to growth from the financial services sector. While credit growth was robust in Q1, demand for credit remained weak, and softening implied oil demand suggested only a limited recovery within China’s heavy industrial sectors. Rising default rates within China’s fixed income markets, along with declining turnover in the overnight pledged repo market, bear careful scrutiny in the coming months as a potential threat to Chinese authorities’ efforts to manage medium and long-term interest rates.
