China’s growth has bottomed out after a slowdown in the first half of this year, but the momentum of the rebound that started in July is waning.
“The third-quarter rebound largely reflected restocking and a front-loading of infrastructure investment, as the government tried to stabilize growth amid the very weak market sentiment in June,” Barclays economist Joey Chew said in a note.
China’s PMI readings -- both the HSBC and NBS surveys -- rose only marginally in September. In fact, the final HSBC PMI release was lower than the flash estimate.
On Monday, the World Bank lowered its growth forecast for China. The bank now expects the Chinese economy to grow 7.5 percent this year, below its April forecast of 8.3 percent, but in line with the Chinese authorities’ official target. China's GDP grew at 7.6 percent for the first half of 2013, slower than 9.3 percent in 2011 and 7.7 percent last year. A 7.5 percent annualized growth rate would mark the slowest pace of expansion in 23 years.
President Xi Jinping reiterated Monday that the recent slowdown in China's economy was taking place in a controlled fashion, and there was no reason to fear a hard landing.
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“Nothing has come as a surprise. … The slowdown of the Chinese economy is an intended result of our own regulatory initiatives,” Xi said at the Asia-Pacific Economic Cooperation forum in Indonesia.
While the authorities have shown a clear tolerance for short-term economic pain to enable more sustainable longer-term growth, analysts believe a 7 percent GDP growth rate is the limit of this tolerance.
The market’s next major focus will be on the Third Plenum of the 18th Chinese Communist Party Central Committee in November.
“We expect the meeting to approve a document laying out the broad principles of China’s next stage of economic reform. Hopes are high that the document will mark a significant breakthrough in policy across a range of economic issues,” Standard Chartered’s David Mann said in a note.
September Data Release Preview
Tuesday (9 p.m. EDT) – Bank Lending: Economists expect new loans disbursed to fall slightly as liquidity returns to other channels of financing. Net new RMB bank lending in August was roughly the same as one year before, and the growth of outstanding bank loans dropped to the slowest since 2006. But companies have increasingly been turning elsewhere for finance, according to Capital Economics’ Mark Williams and Qinwei Wang. Nonbank lending has accounted for nearly half of net new borrowing so far this year and now makes up nearly one-third of outstanding credit. Growth through these alternative channels picked up in August after a short-lived slowdown following June’s cash crunch. These forms of credit are affected by market conditions rather than official quotas. “With interbank rates at their current levels, their issuance may slow slightly, but there doesn’t seem much prospect of a sharp dropoff in growth,” Williams and Wang said.
Friday (10 p.m. EDT) – Trade Balance: External demand has rebounded after a two-quarter slowdown, led by the U.S. and the EU. Economists polled by Reuters expect Chinese exports for September to have grown 8.1 percent from a year ago, compared with a gain of 7.2 percent in August. Imports probably rose by 9.6 percent, following a 7.0 percent rise in August. That would produce a monthly trade surplus of $78 billion.
Sunday (9:30 p.m. EDT) – Consumer Price Index and Producer Price Index: Consumer price inflation edged down in August. A pick-up of pork price inflation was offset by a fall in vegetable price inflation -- vegetable prices rose during the period, but the pace was slower than one year before.
The annual change in the Consumer Price Index is seen edging up to 2.7 percent in September from 2.6 percent in August, according to the Reuters poll. That’s still well below the government target of 3.5 percent. PPI is forecast to fall 1.5 percent in September from a year earlier, compared with a 1.6 percent drop in the prior month.
Standard Chartered forecasts China’s CPI inflation of 2.5 percent in 2013 (from 2.8 percent) and 3.0 percent in 2014 (from 4.1 percent). The producer price index is on a gradual recovery trend, and is likely to take a few more months to reach positive growth territory. Slowing declines in the PPI reflect recovering production and demand.
Oct. 17 (10 p.m. EDT) – Industrial Production, Fixed-Asset Investments and Retail Sales: Industrial production accelerated again in August after July’s turnaround, and economists expect its growth to have maintained its recent pace in September. Reuters' poll shows that industrial production growth probably grew by 10.2 percent in September, compared to 10.4 percent in August.
“The turnaround looks to have been led by infrastructure spending of the state sector, which has benefited heavy industry the most, mirrored by the recent acceleration in electricity output,” Capital Economics’ Williams and Wang said. “September’s investment figures should give further details on whether this imbalance has continued.”
Domestic demand is showing signs of recovery. Fixed-asset investment growth, led by infrastructure and central government-funded projects, accelerated to 21.5 percent in August from 19.9 percent in the second quarter. Loans for FAI are gradually feeding through to activity, and growth in production of cement and steel products (which leads FAI by two to three months) has picked up.
However, housing FAI has moderated as growth in home sales slowed in the third quarter. “We are concerned that developers’ continued aggressive land acquisitions and higher residential apartment prices in Tier 1 cities may trigger further tightening measures from Beijing,” Standard Chartered’s Mann said.
Consumers, however, seem less convinced that their own prospects are improving, at least judging by confidence surveys. Accordingly, economists expect the growth of retail sales to have been little changed at 13.5 percent.
Oct. 17 (10 p.m. EDT) – Q3 GDP: Consensus estimate expects China’s third-quarter GDP to come in at 7.6 percent, compared with 7.5 percent in the second quarter. However, economists remain cautious on the sustainability of the ongoing recovery.
“We expect the recovery will last until the end of the year, with growth likely to slow in 2014,” Haibin Zhu, J.P. Morgan's chief China economist, said in a note.
Zhu cited the following reasons:
First, although stabilizing growth is a high priority in the near term, the longer-term policy priority is economic restructuring and reform. The economy is still facing structural problems of overcapacity in some key industries, together with mounting financial risks from corporate debt and local government debt and the spillover effects from nonbank lending. Addressing these problems in the coming years implies that the scope of economic recovery will be limited.
Second, Premier Li Keqiang made it clear that monetary policy will not be eased this time, unlike in the second half of last year. When the lagging effect of strong credit growth starts to disappear, credit slowing will drag on economic growth in 2014. Moreover, while stronger growth in advanced economies is good news for China’s external demand, uncertainty surrounding the outlook for emerging markets and the fast appreciation in the yuan's real effective exchange rates may offset each other.