China: Growth maintains strength in Q3
October 19, 2016
Despite tentative signs that the fading of policy support could hurt growth, the Chinese economy showed its strength again in Q3 and expanded at a steady rate of 6.7% for the third consecutive quarter. The print was in line with market expectations and puts the economy on track to comfortably attain this year’s 6.5%-7.0% growth target. Post-flood reconstruction works, a burgeoning real estate market and solid gains in private consumption likely shored up growth in Q3.
Although the National Bureau of Statistics (NBS) does not provide a breakdown of GDP by expenditure, additional data suggest that growth in private consumption improved in Q3 as retail sales accelerated to a 10.5% increase in that period (Q2: +10.2% year-on-year). Conversely, investment growth continued to decelerate. Investment among state-owned and state-holding units remained strong in Q3, though it decelerated on waning policy support. Private investment remained weak in the same period, highlighting the fragility of China’s quality of growth as the main drivers remain traditional government-led sectors. Improving financing conditions for private firms and implementing more market-friendly initiatives are key to rebalancing investment towards a healthier trajectory. As a result, urban fixed-asset investment—which covers infrastructure and factory construction—expanded 8.2% in the first nine months of the year, which was below the accumulated 9.0% rise in H1.
On the external side of the economy, weak global demand continued to drag on nominal merchandise exports despite the weakening of the yuan. Overseas shipments declined 6.2% in Q3 (Q2: -5.0% yoy). The stabilization in commodities prices, coupled with improving Chinese demand, prompted imports to contract a softer 4.6% annually in Q3 (Q2: -6.9% yoy). A steeper drop in exports combined with a softer decline in imports may have contributed negatively to the external sector.
Sequential data show that GDP in Q3 adjusted for seasonal factors increased 1.8%, slightly down from the 1.9% expansion registered in Q2. Moreover, overall nominal GDP grew 7.8% in Q3, which was above the 7.3% increase in Q2.
As growth is no longer a major concern, the focus has now shifted to China’s booming housing market and soaring private debt. The increase in housing prices comes after years of relaxing conditions to revamp China’s property market. Some cities have recently started to unveil measures in order to cool soaring prices, including increasing down payments and restricting home purchases, particularly in top cities. While the economic spillovers are still unclear, city-specific measures could be an effective instrument to slowly burst the property bubble. As Tao Wang, Head of China Economic Research at UBS, states:
“Policy makers have so far avoided applying a blanket nationwide property tightening program, likely for fear of overdoing policy cooling to trigger a sudden property sentiment reversal or sharp sales deceleration. As such, property policy tightening remains differentiated; targeting areas where the sales/price/leverage rally has been most concentrated. […] On balance, we think these measures will have a moderate cooling effect in the coming months.”
An accommodative monetary policy stance and government-fueled growth via cheap credit prompted private sector debt, which includes household and corporate borrowing, to skyrocket from around 115% of GDP in 2008 to 210% of GDP in Q1 this year. The State Council unveiled a raft of measures on 10 October to cut private-sector leverage, including swapping bad debt for equity and facilitating the bankruptcy of zombie firms. However, analysts are skeptical about the plan as it does not address structural problems, such as how to prevent companies from incurring bad debt again in the future.