Marching Steadily Ahead
Executive Summary
Though news that the economy grew 7.7% this year through Q3 was enthusiastically welcomed by China’s policy community, many are concerned about what Q4 will bring.
The most powerful contributor to Q3 growth was the accelerated rise in industrial output, up 9.6% for the first nine months of the year, a 0.3 pps climb from Q2. The increase is believed to be largely due to temporal factors, such as the bad weather that increased demand for electricity and other industrial products.
Fixed asset investment increased 20.1% in the year to October, flat on Q2. FAI in property development slowed in Q3, but public investment projects in railway construction and urban infrastructure increased. We don’t think the pace of investment growth will increase further, though.
Retail sales rose 11.4% y/y in Q3, down 0.5 pps from Q2. New home sales surged in Q2, but now seem to be slowing.
And export growth slowed. Commodity exports in dollar terms were up 3.9% y/y in Q3, down 1.1 pps from Q2. China’s exports to other emerging economies are also soft.
Despite economic steadiness, CPI inflation seems to be picking up. The index rose 3.1% y/y or 0.8% m/m in September, far higher than in previous months. PPI deflation is also ending, rising in m/m terms three months in a row.
Monetary policy remains basically neutral, and money growth has slowed moderately. High interest rates continue to frustrate many business borrowers.
The slowdown in trade growth has had another effect: service sector growth is outstripping economic growth. Other factors are also driving the service sector to speed up. We expect the structural shift to continue, though the trend will have lots of barriers to overcome. An implication of the faster growth in service for the government finance is that tax revenue may rise more slowly than before.
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