China's medicine works, with side-effects

China’s lowest quarterly growth rate since 1992 is cause for quiet confidence. Not just because 6.1% still beats the rest of the world into a cocked hat – Singapore’s economy just shrank twice as fast as China grew. There are signs that Premier Wen Jiabao’s $585bn stimulus is taking effect. The problem now isn’t the efficacy of the medicine but the severity of the side-effects.

On their own, GDP figures don’t mean much. They reflect what was, not what is – and in China their reliability is always questionable. But the statistical news flow is encouraging. Investment shot up in the quarter by over 30% in March, and retail sales grew 15%. Those are the very things the stimulus is supposed to stimulate. Exports fell sharply, but March was less hellish than February.

That suggests China has bottomed out. Still, injecting liquidity into the system is no simple task. Money growth, measured by the M2 indicator, grew 25% as banks increased their lending. The worry is that not all of that goes to the right things. Consumer prices are falling – but share prices are rising, and real estate transactions have picked up dramatically.

That could imply the beginnings of speculative fever. As much as 40% of the new money lend by banks could be working its way into "fast-buck" investments such as stocks and property, Credit Suisse estimates. Beijing might have cured some of its illnesses, but a bout of asset price inflation could be the unfortunate, and stubborn secondary infection.

Moreover, there’s a long way to go. Putting money in consumers’ hands might make them spend a bit, but real, sustainable consumption growth won’t be engrained until China carries out its loftier aims. Reforming healthcare and pensions are the key to getting consumers to take their cash out of the mattress – and on those plans, details and numbers are still lacking. For now, China is still just the least sick patient on the ward.