- Real GDP accelerated from 7.9% (Q2) to 8.9% (Q3).
- Composition shows growing importance of consumer and housing and improvements in trade.
- To manage the economy, we are likely to see increased controls on lending, followed by increasing reserve
requirements, renewed RMB appreciation, and finally interest rate hikes.
Chinese real GDP growth accelerated on a year-overyear basis by a full percentage point, rising from 7.9% in the second quarter to 8.9% in the third quarter. While the statistical authorities do not publish any official figures on the quarter-over-quarter rate of Chinese real GDP growth, our own estimates are that the economy expanded by a 9.0% annualized rate (SAAR) in the third quarter over the second quarter, a deceleration from the estimated 14.9% expansion in the previous quarter. Concern is increasingly shifting from the magnitude of growth to its composition, meaning a differential tightening will continue to take hold, with credit being more tightly managed in the near term before any broader tightening in monetary policy or appreciation of the currency is undertaken.
While economic growth in the first half of the year was principally driven by stimulus spending directed at government-led infrastructure investment, the third quarter shows that the engine of growth for the Chinese economy is broadening. First, there is much more strength coming from consumer spending. In part, this reflects tax incentives in place for auto purchases, but the strength in auto sales goes beyond what can be explained just by tax breaks and the strength in overall consumer spending goes beyond just autos.
We are also seeing more strength coming from the housing sector. In part, this is also supporting consumer spending, with construction, furniture, and household appliance sales having been quite strong. But, residential investment’s contribution to GDP growth has also been rising, with the investment completed in real estate development up 18% y/y in September, up from 10% in June. Outside of residential investment the growth of overall investment in the economy – while still strong – has been cooling, as other sectors come to life.
Lastly, while net trade remains a drag on the economy, the gap between exports and imports is quickly narrowing. While infrastructure investment drove nominal imports up 79% SAAR in the second quarter, this stregnth eased to 44% in the third quarter. Meanwhile, exports, which had seen quarterly contractions since the fourth quarter of 2008, were up 27% in the third quarter – the strongest growth since the first quarter of 2007. The ongoing improvement in U.S. and European industrial production suggests Chinese trade performance should improve further and net trade could actually contribute to growth in the final quarter of 2009. The attention of policymakers has already begun to shift. Premeir Wen Jiabao recently stated that the key challenge will now be maintaining the pace of economic growth that currently exists, while continuing to restructure the economy and manage inflation expectations. To ensure the goal of rebalancing the economy, we have seen increasing attention placed on bank lending and asset markets by Chinese regulators. The constraints on first-time home buyers have been eased while requirements for secondary purchases have been tightened to control speculative buying. Within the composition of total investment, we are seeing strong growth in investment in the service sector and rural areas, and much less in machinery and equipment and urban areas. But with the pace of growth on track, there is increasing attention on the rising price of food and the possibility this inflation could eat into the purchasing power of households. As a result, banks are being actively encouraged to slow the pace of overall lending to help control overheating. We are also likely to see reserve requirements raised early in the second quarter of 2010 to further reduce lending. With capital inflows putting renewed pressure on the renminbi to appreciate, authorities will not be inclined to raise interest rates until the Federal Reserve does – which we expect will be 2011 Q1 – so as not to increase the incentives for capital inflows. But to help control domestic inflation and reduce the need to accumulate fx reserves and sterlize the inflationary impact, we could see the renminbi start to appreciate in the second half of 2010.