Development pains

China's 7.4% growth just enough to save face

China's 7.4 per cent increase in GDP (gross domestic product) for the first quarter of 2014 is enough to save face. While the pace of advance hasn't been lower since 2009, there are enough signs of improvement to avoid a humiliating economic stimulus - with the exception of an increasingly troubled real estate sector.

Growth that missed the government's full-year target was still more than most economists expected. And, things are getting better, somewhat. Industrial output, retail sales and electricity production improved in March. The wider goal of employment creation remains on track, which makes a slowing economy tolerable. So far this year, China has added three million urban jobs, out of an annual target of 10 million. Premier Li Keqiang says China doesn't need a big fiscal aid package. For now his words look sincere.

There's a blot on the landscape, though. China's property developers are running out of money. The recent insolvency of one developer, Zhejiang Xingrun, set the tone. Even as the vast amount of housing under construction swelled by 11 per cent in March, the space coming from new projects was actually 27 per cent lower than a year ago. Sales of residential property, by floorspace, fell 10 per cent in the latest month. China's planners have deliberately cut off distressed builders' access to hot money. Of the robust $129 billion increase in China's foreign reserves in the first quarter, $76 billion came from "financial flows", according to Royal Bank of Scotland. Much of that will have gone to property developers. But a concerted attempt to repel speculators, including a managed 2.6 per cent depreciation of China's currency since February, is likely to have sent investors in the opposite direction.

China may soon be forced into making a choice. If it really is foreign funding that has been keeping many property developers going, the government might have to step into the breach, or let builders go bust and risk a slump that would hit the wider economy hard. China can have a less crisis-prone real estate sector, or tighter capital controls; with domestic growth this slow, it's hard to have both.