On the face of it, the last major round of economic data for the September month and quarter was a little better than expected – third quarter GDP rose at an annual rate of 6.9%, down on 7% in the first and second quarters and 7.3% for all of 2014.
That was better than many forecasts, which ranged from 6.4% to 6.8%, and there were suggestions that the Chinese economy is doing a little better than expected.
But much of that looks like being the result of a sharp rise in government spending – up 27% in September from a year ago.
The 6.9% growth rate was the weakest reading since the first quarter of 2009, when growth slid to an annual 6.2% as the economy struggled to escape the drag of the GFC.
And when you dug into the monthly data for production, retail sales and investment, the figures were a little worse than they looked.
But that data refers to the manufacturing and investment side of the economy which is definitely struggling from weak demand (especially in export markets), falling costs (intense deflation) and rising labour costs.
Economists said the figures suggest a stronger performance from the expanding services side of the economy.
Factory output rose 5.7% in September from the same month in 2014, down from 6.1% in August and forecasts for a rise of 6%.
That outcome supported the weak readings for the two manufacturing activity surveys released at the start of the month, and continuing deep deflation in producer prices (which are falling at an annual rate of 5.9%).
The slide in imports in September also supported to dip in output. Exports last month were a little stronger, but falling commodity prices has added to the intense price deflation in manufacturing.
Fixed-asset investment, the long time driver of Chinese economic growth, rose 10.3% in the first nine months of the year, below market estimates of 10.8% – a not so surprising outcome given the continuing drive by the government to move growth from an investment-driven basis to consumption (services).
Retail spending grew at an annual rate of 10.9%, slightly better than forecasts for 10.8% growth, which was also the outcome for August.
The September figure of 10.9% was the highest reading for retail sales so far in 2015 (and came despite a sharp fall in food prices in the month). Retail sales rose 10.5% in the nine months to the end of September.
The decline in industrial activity, by contrast, reflects the same trends in overcapacity that have driven producer prices into deflation for 43 straight months.
China’s exports growth dropped 7.9% year on year in the first nine months of the year, according to the National Bureau of Statistics.
During the first nine months, industrial output grew 6.2% year on year and fixed-asset investment rose 10.3%.
Property investment grew 2.6% year on year. China’s Statistic Bureau said that was 0.9 percentage point slower than that in the first eight months and down by 2 percentage points from that in the first half, meaning property remains a drag on the wider economy.
“Underlying conditions are subdued but stable,” said Julian Evans-Pritchard, an analyst at Capital Economics in Singapore. “Stronger fiscal spending and more rapid credit growth will limit the downside risks to growth over the coming quarters,” according to a report on Reuters.
The dip in GDP below 7% means the country could struggle to meet the official target for 2015 of growth ‘about’ 7% (certainly inflation at 1.2% will undershoot the official target of 3.5%). It also raised suggestions of another rate cut and/or fall in the reserve requirement ratio (RRR) for banks to boost lending.
“As growth slows and risk of deflation heightens, we reiterate that China needs to cut reserve requirement ratio (RRR) by another 50bps in Q4," economists at ANZ Bank said in a note to clients yesterday.
"Looming deflation risk suggests that the People’s Bank of China will also adjust the benchmark interest rates, especially lending rate, down further,” the ANZ said.
China’s central bank has cut interest rates five times since late last November and reduced banks’ reserve requirement ratios three times this year.
The impact of government stimulus spending was clear to see in other figures released yesterday, showing government outlays were up 27% in September from a year ago.
