Disregard the Downgrade
Q3 growth was stable, though slightly lower. GDP was up 6.8% y/y, down 0.1 pps from Q2, while industrial output was up 6.3% y/y, down 0.5 pps. But industrial output in real terms might be worse than official statistics show. Fixed asset investment has been weakening, and was up 5.8% y/y in Q3. After removing the price factor, fixed asset investment fell -0.6% y/y, down 5.1 pps from Q1. Retail sales of social consumption goods were up 10.3% y/y in Q3 in nominal terms, and up 9.2% y/y in real terms, both down 0.5 pps from Q2. Total imports rose 14.6% y/y, flat on Q2, still a fast-growing trend. We expect imports to keep rising. Exports were up 6.9% y/y, down 2.3 pps.
President Donald Trump’s appointment of Jerome Powell as the next Federal Reserve chairman is seen as a nod toward tightening monetary policy. That will put upward pressure on China’s interest rate, and depreciation pressure on the RMB. Both are relatively stable. Producer prices continue to appreciate. The ex-factory price index of industrial products was up 6.9% y/y, up 1.4 pps from June. PPI rose 8.5% y/y, up 1.2 pps. At the end of September, the M2 money supply was 9.2% y/y, down 0.2 pps from June. M1 rose 14% y/y, down 1 pps.
The National Financial Work Conference in July singled out prevention of financial risks as a priority. Chinese overseas M&A has often made major newspaper headlines. On August 18th, the State Council gave detailed instructions about sectors where direct investment should be more restricted, such as real estate, hotels and entertainment. This may reduce or even stop currently highly-leveraged corporations from investing. This initiative should prevent systemic financial risk.
S&P Global Ratings on September 21st cut China’s sovereign credit rating for the first time since 1999, to A+ from AA-, citing risks from soaring debt. We see this downgrade as overreaction, and misleading. Debt may not be a bad thing, especially when a country uses it to finance some projects with long-term returns, such as high-speed trains or urban subways, benefiting not only consumers but also firms, through market integration. We agree with Chinese government officials’ response, that economic fundamentals are sound.
China’s Communist Party recently held its 19th National Congress, elected a new leadership and set its future policy themes. President Xi Jinping will remain in his post, indicating a continuation of the current policy line. This announcement has reduced policy uncertainty. Xi said the main themes for the next five years would be openness, entrepreneurship and resolving inequality. Economists also view these areas as priorities for development. Entrepreneurship will drive productivity growth, transforming China’s model of investment. Inequality is a primary issue for political stability. We are positive on China’s future growth, given the government’s objectives.
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