China’s economy grew at a steady 6.4 percent pace in the first quarter, defying expectations for a further slowdown, as industrial production jumped sharply and consumer demand showed signs of improvement.

The upbeat readings, which included faster growth in investment, will add to optimism that China’s economy may be starting to stabilize even as Beijing and Washington appear to be edging toward a trade deal.

Investors have ranked China’s slowdown and the trade war as the biggest risks facing the faltering global economy.

But analysts warn it is too early to call a sustainable turnaround, and further policy support is needed to maintain momentum in the world’s second-largest economy. Many had expected a recovery only in the second half of 2019.

Beijing has ramped up fiscal stimulus this year, announcing billions of dollars in additional tax cuts and infrastructure spending, while Chinese banks lent a record 5.8 trillion yuan ($865 billion) in the first quarter, more than the economy of Switzerland.

“We need more evidence to call a full-fledged recovery. Our view for the economy is still cautious,” said Jianwei Xu, senior economist, Greater China at Natixis in Hong Kong.

“We think it (the stronger-than-expected data) is somewhat linked to the stimulus, but we can’t attribute it all to it.”

Analysts polled by Reuters had expected GDP growth to slow slightly to 6.3 percent in January-March from a year earlier.

Share markets and most currencies in Asia rose in relief, as China’s slowdown has increasingly weighed on its trading partners from Japan to Germany. The yuan currency rose 0.4 percent to a 7-week high.

Government support is gradually having an effect, though the economy still faces pressure, Mao Shengyong, spokesman at the National Bureau of Statistics, cautioned on Wednesday.

Quarterly growth was supported by a sharp jump in industrial production, which surged 8.5 percent in March on-year, the fastest in over 4-1/2 years. That handily beat estimates of 5.9 percent and 5.3 percent in the first two months of the year.

Output of building materials such as steel and cement, as well as machinery, showed strong gains. Prices of steel reinforcing bars used in construction hit 7-1/2 year highs this week on firm demand.

Industrial output growth will likely remain steady, with exports expected to keep expanding, Mao said.

Exports rebounded more than expected in March, but analysts say the gains could have been due to seasonal factors rather than a rebound in tepid global demand. Long holidays in February likely pushed some production into the following month.

The jump in output was also somewhat at odds with trade data last week, which showed imports shrank for the fourth straight month, suggesting domestic demand is still sluggish.

“We don’t think the strength in industrial output is sustainable, said Nie Wen, an economist at Hwabao Trust.

“At home, the huge amount of social financing might ease as the central bank is wary of reigniting property market bubbles, while abroad the global economic recovery is expected to slow down,” Nie said, penciling in more moderate output growth of 6.0-6.5 percent for the rest of the year.

The OECD on Tuesday sounded a warning about the dangers of prolonged stimulus, saying China’s support measures will shore up growth this year and next but may undermine its drive to control debt and worsen structural distortions over the medium term.

Analysts polled by Reuters expect China’s growth to slow to a near 30-year low of 6.2 percent this year, as sluggish demand at home and abroad and the trade war weigh on activity despite support measures.

The government is aiming for growth of 6.0-6.5 percent.

IMPROVING RETAIL SALES
Wednesday’s data also helped ease fears of weakening consumer confidence in China. Retail sales rose 8.7 percent in March, beating estimates of 8.4 percent and the previous 8.2.

Sales were led by stronger demand for appliances, furniture and building materials, reflecting a resurgence in the residential property market, a key economic driver.

Real estate investment rose slightly to 11.8 percent in the first three months, while construction starts jumped in March. Data on Tuesday showed March new home prices rose at a quicker pace after months of cooling.

But auto sales extended their decline in March, falling 4.4 percent on-year.

Fixed-asset investment expanded 6.3 percent in January-to-March on-year, in line with estimates but picking up from the previous period as new road, rail and port projects gathered steam.

Local governments will be allowed to issue 2.15 trillion yuan ($321 billion) of special purpose bonds in 2019 to fund infrastructure projects, a jump of 59 percent from last year.

NO SHARP REBOUND EXPECTED
On a quarterly basis, GDP in the first quarter grew 1.4 percent, as expected, but dipped from 1.5 percent in October-December.

However, many analysts do not expect a sharp rebound in China’s economy like its recoveries in the past, which produced a strong reflationary pulse worldwide. Most say its stimulus has been relatively more restrained this time around, given concerns about high levels of debt left over from past credit sprees.

Earlier support measures will take time to fully kick in, and corporate balance sheets are expected to remain under stress if profits are slow to recover from their worst slump in more than seven years.

Some analysts such as Nomura warn there is a risk of a “double dip”, where growth appears to improve only to falter soon after. In particular, it noted there was further heavy drop in land sales for future development, which could drag on construction and local government revenues later this year.

The central bank has already slashed banks’ reserve requirement ratios (RRR) five times over the past year and is expected to ease policy further in coming quarters to spur lending and make borrowing costs more affordable.

However, some analysts said authorities could be more cautious about further stimulus if data remains solid.

China has rolled out many policies to support growth – the key is to implement them, Mao said. – Reuters