China delivered a set of stronger-than-expected macro data for 1Q 2017; however, market remains worried about growth sustainability.

In our view, China’s economy recovery is likely to be in its early days, and has more legs to run. The recovery was jump-started by a set of powerful easing of monetary and fiscal policies since mid-2015, and was most acutely felt in a few sectors such as property, auto and upstream industries. However, with corporate cash flows and labor market improving as well as external demand on the mend, the economic recovery has become more broad-based, and therefore, more sustainable.

Therefore, policy tapering, or tightening, is also likely to be in its early days. Such tapering aims to withdraw excessive policy stimulus (relative to the strength of the economy) but not to become restrictive to the growth momentum. Hence, policy actions tend to be gradual, and begin with a modest tightening in monetary conditions, while fiscal policy adjustment comes later in the cycle.

Will a house-cleaning of “financial excess” through regulatory tightening lead the real economy to tumble? While we need to watch for such downside risks closely, we believe we are unlikely to see a “credit-crunch” episode similar to 2013. Regulatory tightening is likely to cause pains for those excessively levered carry trades, but unlikely to spill over to the real economy.

From a cyclical perspective, timely adjustment in macro policy stance remains the key for sustainability of the cycle. In this context, the monetary and fiscal policy adjustments have so far helped enhance the sustainability of the current expansion cycle.

Over the medium term, the key to a sustainable growth cycle is productivity improvement, which may take years for observers to confirm or refute. While the market consensus is that much remains to be done on structural reforms before China’s growth can stabilize, we believe quite a lot have already been accomplished and we see early signs of some reform dividends emerging.