China: Resilient domestic dynamics shore up overall growth in Q3
October 19, 2017
Despite the government’s efforts to reduce financial leverage and curb a booming housing market, China’s economic performance remains stubbornly solid, and growth is set to comfortably beat the 6.5% target for this year. Moreover, monthly indicators suggest that the economy ended Q3 on a healthy note, paving the way for another healthy result in Q4. GDP rose 6.8% annually in Q3, a notch below the 6.9% increase recorded in the first two quarters of the year.
Although the National Bureau of Statistics (NBS) does not provide a breakdown of GDP by expenditure, additional data suggests that the slight moderation in Q3 was due to poor dynamics in investment. Stricter environmental regulations likely took a toll on manufacturing, heavy industries and mining investments. Conversely, infrastructure and property investments improved in the same period, defying tighter fiscal and policy regulations. Nominal retail sales remained robust in Q3, suggesting resilient private consumption. An acceleration in nominal merchandise import growth also points to private consumption becoming the main driver of growth. Exports, however, slowed in Q3, likely reflecting a stronger yuan. Stronger imports, coupled with a deceleration in exports, suggest that the contribution of the external sector to overall growth deteriorated in Q3.
Sequential data shows that GDP in Q3 adjusted for seasonal factors increased 1.7%, slightly down from the 1.8% expansion in Q2. Overall nominal GDP grew 11.2% annually in Q3, which was above the 11.1% increase in Q2 and mainly the result of higher commodity prices.
This year’s healthy economic momentum is a tailwind for President Xi Jinping, who intends to transition towards a more sustainable growth trajectory. Strong growth will allow the continuation of economic and social reforms to meet Xi’s call for putting quality first and prioritizing the country's economic development. While fears of rising protectionist trade policies have vanished, the main downside risk to China’s stellar economic performance is an abrupt slowdown in the property market and disordered financial deleveraging.