Stable growth for China as long term costs mount

Craig Botham, emerging markets economist at Schroders, comments on China’s latest GDP figures.

Chinese third quarter GDP grew 6.7% year-on-year, in line with expectations, and unchanged from the second quarter. A breakdown of the data reveals an acceleration in primary industry and a smaller increase in the tertiary, or services, sector. Manufacturing managed stable growth. Overall, this is not a promising sign for the rebalancing story, and suggests growth is being maintained at the cost of longer term sustainability.

A look at the higher frequency data helps to illustrate this point. Over the quarter, credit growth barely slowed despite a dip in corporate lending, as mortgages and government municipal bond issuance helped to fill the void.

Yet we are now seeing a crackdown on the property market both through macroprudential and, reportedly, the credit channels as the central bank leans on lenders. In tandem, the ability of local governments to support credit growth through municipal bond issuance is waning. A quota ceiling of RMB 6.2trn for the year implies a reduction in the average issuance for the final three months of the year, from RMB 600bn per month to RMB 400bn.

When you consider that even with this support governments have been unable to do more than halt the decline of investment, a softer investment outlook as 2016 closes seems certain.

Part of the problem has been, and remains, weak private sector investment. This growth has taken another step down in the third quarter. A number of challenges face the private sector: overcapacity, lower profits and a higher cost of credit.

The return of producer price inflation to positive territory may help with profitability but the other problems do not look likely to go away. The central bank seems reluctant to ease in the context of a property market bubble and building currency depreciation pressure, and state-owned enterprises (SOEs) continue to weigh on capacity.

In property, which has driven much of the growth this year, September sales continued to surge. Yet despite the booming sales environment, new starts decelerated sharply. That this came even before the majority of restrictions were introduced suggests a further slowdown is likely, which will weigh on fixed asset investment.

One final reason to expect something of a slowdown in the final quarter is simply that the government can afford it. GDP growth so far this year has been comfortably above the 6.5% target, such that even 6% growth in the final quarter would see the government deliver.

Consequently, policymakers may prefer to keep their remaining powder dry in the fourth quarter, saving their firepower for 2017 to ensure strong growth ahead of the 19th Party Congress.

Statements from Xi on the importance of fiscal policy, and on the importance of state control of SOEs, suggest to us that market reforms are taking a definite back seat to growth for the time being, regardless of the long term costs. Growth should largely meet its target this year and in 2017, but the longer term picture is deteriorating.

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