Craig Botham, Emerging Markets Economist, Schroders on China’s return to GDP growth…
China’s third quarter GDP growth rebounded to 7.8% year-on-year, having decelerated to 7.5% year-on-year in the last quarter. The figure was in line with consensus expectations and reflects the mini-stimulus and fine-tuning measures enacted by Beijing in response to the second quarter slowdown. Equity investors should be cheered that nominal growth recovered more strongly, climbing from 8% year-on-year to 10.4% in the third quarter. This is indicative of growing (but not concerning) inflationary pressure, and is a positive for earnings.
Looking at a breakdown of the figures reveals that investment again took the dragon’s share of growth, contributing 4.3 percentage points on a year-to-date basis, up from 4.1 in the second quarter. While consumption also increased its contribution, to 3.5 percentage points from 3.4, it is clear that investment remains the main growth driver for now, despite talk of a reform of China’s growth model.
On the downside, monthly activity data points to deceleration in the final quarter. Fixed asset investment, industrial production, retail sales and trade data releases have all been weaker in September than in August. Consequently, we expect a weaker GDP figure for the fourth quarter, but overall it is unlikely China will miss its 7.5% growth target this year.
So, we’ve seen the Chinese dragon regain altitude, which will be welcome news for jittery investors, but we remain cautious about the outlook going into the fourth quarter and beyond.
We look for a concerted move towards reform at November’s Plenum to keep China’s growth on a sustainable footing. Expect turbulence.
