(Bloomberg) -- China's former industrial heartland is being helped out of its economic malaise by surging producer prices and government spending. Those supports may be about to weaken.
Two of the biggest laggards posted turnarounds in the first quarter. Growth returned to Liaoning, the heavy-industry base in the northeast, where gross domestic product expanded by 2.4 percent, compared to the 2.5 percent contraction in the same period last year. Shanxi, the northern coal-mining province mired for years in producer-price deflation and excess capacity, grew 6.1 percent versus 4.5 percent in 2016.
Even so, as factory inflation returned late last year, year-on-year comparisons are due to moderate, and debt-fueled investment will likely fade as President Xi Jinping directs top policy makers to ensure financial stability before a twice-a-decade leadership transition later this year. China's official manufacturing gauge declined from an almost five-year high in April as commodity prices softened, raising doubts that the acceleration over the past two quarters will continue.
Other regions which were previously star performers lost some shine in the first three months of the year. Chongqing and Guizhou, two southwestern provinces that posted the fastest growth among all 31 provincial-level regions last year with expansions topping 10 percent, decelerated slightly in the first quarter, to 10.5 percent and 10.2 percent respectively.
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China is "now relying more on the old economy rather than the new economy," said Zhu Ning, author of "China's Guaranteed Bubble" and deputy director of the National Institute of Financial Research at Tsinghua University in Beijing. Still, the rust-belt rebound "paved the way for increasing leverage and financial risk that President Xi vowed to fight."
Industrial profits jumped 28.3 percent in the first quarter from a year earlier, extending a surge as producer prices held gains, boosting steel mills, coal mines and heavy equipment makers. Earnings of state-owned industrial enterprises soared 70.5 percent.
Rising profits enable those companies to borrow more, adding to the balance sheets of government-owned banks. Liaoning's inventory of loans rose 6.2 percent from a year earlier at the end of March, more than double the pace of first-quarter GDP growth.
Expansion weakened slightly in Jilin, another northeastern laggard neighboring Liaoning, growing 5.9 percent in the first quarter compared with a 6.9 percent increase last year.
Surging factory prices gave Shanxi the greatest support. The provincial producer price index increased 24.8 percent in the first quarter and coal prices rose 43.4 percent, according to the local statistics bureau. The government's fiscal revenue also recovered, increasing 12.6 percent in the first three months compared to a drop of 5.2 percent last year.
Expansion in Yunnan, the southern province bordering Vietnam and Myanmar, quickened to 9.9 percent in the first quarter from 8.7 percent in 2016. Strength in the power-supply sector led the way, jumping 26.1 percent from a year earlier.
Fiscal support also boosted the struggling provinces, according to Chua Han Teng, a Singapore-based senior analyst at BMI Research, a unit of Fitch Group Inc. "The recovery isn't likely to last as aggressive fiscal support is likely to be pulled back over the coming quarters," Chua said. "Provinces will face political pressure to conduct reforms."
Thirteen provinces posted growth accelerations, while 13 registered declines and five were unchanged from 2016. China's economic growth unexpectedly picked up to 6.9 percent in the first quarter, clocking its first back-to-back acceleration in seven years.
Guangdong and Zhejiang, coastal economic powerhouses where private businesses and exporters play a more central role, both accelerated at a slower pace.
--With assistance from Kevin Hamlin
To contact Bloomberg News staff for this story: Xiaoqing Pi in Beijing at xpi1@bloomberg.net.
To contact the editors responsible for this story: Malcolm Scott at mscott23@bloomberg.net, Jeff Kearns, Jeff Black
With assistance from Xiaoqing Pi
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