By Brian Jackson, China Economist, IHS Global Insight
Key Points:
- Chinese gross domestic product expanded at 6.7% in the third quarter, unchanged from the first half. While overall real growth was stable, service sector growth accelerated 0.1 percentage points (pp), industry and construction growth decelerated 0.2 pp, and agricultural sector growth accelerated 0.9 pp.
- Net new financing to enterprises and households was CNY 1.7 trillion in September. The rise compared to August was almost entirely due to stronger local currency loan issuance.
- Chinese industrial output growth slowed to 6.1%. The slowdown was due entirely to slower manufacturing growth.
- Fixed-asset investment growth accelerated marginally to 8.2%. The primary reason for the improvement was the acceleration in secondary sector investment; this came from slower contractions in construction investment and somewhat faster (but still low single digit) growth in overall manufacturing investment.
- Investment for real estate development accelerated to 5.8% growth. This modest improvement appears to be concentrated in land sales, which grew at a 33-month high.
- Retail sales expanded at a marginally faster pace in September. Real per capita disposable income slowed from 6.5% to 6.3% growth, mostly due to slower growth in the urban component; nominal median income growth slowed by a similar magnitude to 8.1%.
Outlook & Implications
Growth in the third quarter remained stable largely on account of stronger services growth. While a subsector breakdown of GDP will not be available until tomorrow (20 Oct), it is very likely that loan finance was the cause of that minor services improvement. Finance sector growth was a notable drag in the second quarter, growing only 5.3% compared to 9.9% in 2014 or 15.9% in 2015. Weak growth in Q2 2016 was due especially to the high base from the 2015 stock market boom, most pronounced in Q2 that year. Similarly, the decline was sequentially deepest in Q3 2015, creating a one-off lower base to grow against in the most recent quarter. As with real estate cyclicality, this provides an upside for growth in the most recent quarter, but is not durable. More immediately, rising purchasing restrictions in China’s tier-1 and -2 cities will put the brakes on real estate services in the fourth quarter, admittedly slightly later than expected. The most recent data do not materially impact our expectation of a minor GDP deceleration in the fourth quarter, or for a more significant deceleration in 2017 to 6.3% growth.
A separate question is the plausibility of Chinese growth remaining unchanged over the past three quarters. During that period some components rose and others fell by just enough to maintain perfectly stable headline growth. This naturally invites doubt, especially when the official growth reading is centered within the government’s target range. While harboring these doubts is justified, a nuanced assessment using physical production data points to an acceleration, rather than stability, during the third quarter. Our estimates indicate that growth was possibly over-reported in the first half, but is possibly slightly under-reported in the third quarter.
It’s important to highlight that China’s official method to calculate GDP for most sectors is surveying value-added (operating surplus, wages, taxes and depreciated assets), rather than volume growth. Under that approach, GDP can grow from both higher volumes and/or increased margins between non-labor inputs and final output per unit, the latter signifying increased productivity. Taking both the official and our proxy GDP readings as a given, this would imply that productivity growth was relatively strong last year and in the first half of 2016, but volume growth has once again become more important for headline GDP growth - a plausible but concerning narrative, given the government’s focus on volume-oriented stimulus as well as the falling share of higher-productivity private investment in recent months.