Just as most macro indicators have been suggesting for the past couple of months, the Chinese economy has stabilised during Q3 and growth accelerated to 7.8% y/y, in line with consensus and higher than our estimate of 7.5%. The average growth for the first three quarters is 7.7%, making the government very likely to meet the whole year target of 7.5%, which we have never doubted it would.
The quarterly growth came out at 2.2% q/q, versus 1.9% expected by the markets and 2.0% by us. We call for greater attention on quarterly growth, as it provides a cleaner comparison between economic performances in each quarter adjusted for basis effect.
The reason for the better growth figures is that Beijing went back to the old growth model and turned up heat for investment, which contributed 4.4% points to Q3 growth. Consumption added 3.5% points and net exports subtracted 0.1% points. This confirmed our belief that although Beijing’s tolerance for lower growth has increased, Li Keqiang is not going to be the first premier, who missed the growth target.
The current improvement in the economy is exclusively caused by cyclical factors, such as restocking process, and is likely to be short-lived. The global recovery continues to remain unstable, so China cannot rely on external demand to drive its economy. The top leaders have understood this perfectly and seemed to have no problem in letting the CNY to reach a new record high versus the USD (6.09 at the time of writing).
Structurally, China has reached the point, where fundamental reforms are necessary to tackle the country rising problems with credit risk in the financial system and overcapacity in the industrial sector. Just this week the State Council released a plan to reduce production capacity in the steel sector, where overcapacity issue is worst, by 80 million tons within the next five years. China’s new growth model means that credit expansion and investment growth will be contained in the future. More reforms to address long-term challenges will possibly be announced in the third plenum (annual meeting in the communist party) in November. The growth target will likely be reduced to 7.0% next year to accommodate the change.
Nordea