China: The weakest performance since the financial crisis in the third quarter spells sharper Chinese slowdown
The Chinese economy decelerated further in the third quarter as the effects of aggressive financial deleveraging bogged down growth. GDP expanded 6.5% in annual terms in Q3, down from the 6.7% expansion recorded in Q2. The figure was below market analysts’ expectations of 6.6% growth and the softest print since Q1 2009. In seasonally-adjusted quarter-on-quarter terms, GDP growth inched down to 1.6% from a downwardly-revised 1.7% expansion in Q2 (previously reported: +1.8% quarter-on-quarter).
Although the National Bureau of Statistics (NBS) does not provide a breakdown of GDP by expenditure, additional data suggests that softer investment growth drove the slowdown, weighed on by tighter credit conditions for local government financing and higher borrowing costs. Fixed asset investment spending moderated significantly in the quarter, with infrastructure investment, in particular, slowing notably. On the other hand, manufacturing investment continued to accelerate throughout the quarter, likely due to the shift towards high value-added sectors related to the “Made in China 2025”. Overall, retail sales were subdued and a sharp decline in car sales throughout the quarter suggest household spending weakened in the quarter, despite resilient consumer confidence. Meanwhile, the external sector appears to have remained intact, likely propped up by exports associated with the Belt and Road Initiative and the frontloading of shipments before U.S. tariff increases likely to come into effect at the outset of 2019.
Looking at the breakdown by sector, the secondary sector, which includes manufacturing and construction, posted its worst performance since Q1 2009. Meanwhile, growth in the tertiary sector, which is the largest sector in the Chinese economy, and the primary sector both saw modest upticks in growth.
The third quarter’s performance confirms that the Chinese economy is feeling both domestic and external pressures and the economy will continue to face major headwinds towards the end of the year and moving into 2019. Tighter regulation to rein in elevated debt is weighing on growth and investors’ fears about the outlook are rippling through domestic stock markets and hitting Chinese equities. Trade tensions between the U.S. and China continue to fester and the impact of the rift will likely materialize more concretely in the near-term, especially if the tariff rate on USD 200 billion of Chinese goods rises from 10% to 25% on 1 January 2019. Recently, the government has made efforts to preempt a slowdown—by boosting lending and increasing fiscal stimulus—while the People’s Bank of China lowered the required reserve ratio for banks, in order to boost financing.