by Rajiv Biswas, Asia Pacific Chief Economist for IHS Markit
- China’s Q3 2017 GDP growth rate was robust, growing at 6.8% year-on-year (y/y), indicating that growth momentum only eased marginally compared to the 6.9% growth rate recorded in Q1 and Q2.
- On a quarter-on-quarter (q/q) basis GDP growth momentum also remained strong, up 1.7% q/q in Q3 compared with 1.8% q/q in Q2.
- China’s new growth engine continues to be household consumption, which contributed 64.5% of total GDP growth in the first three quarters of 2017, which was 2.8 percentage points higher than the same period of 2016. President Xi highlighted the key role of consumption in underpinning future Chinese growth during his speech to the 19th CPC Party Congress.
- Exports have also performed strongly in the first three quarters of 2017, rising by 12.4% y/y, driven by growth in exports of mechanical and electrical products, which grew by 13% y/y and accounted for 57.5% of total export value.
- Industrial production has accelerated, with value added rising by 6.7% y/y in real terms in the first three quarters of 2017 compared to the same period a year ago. The high tech manufacturing sector has led manufacturing growth, posting a 13.4% y/y increase in value added. Sustaining such rapid growth of high tech manufacturing indicates that the Chinese government’s Made in China 2025 policy is succeeding, which is critical to the vision outlined by President Xi in his speech to the 19th Party Congress to transform Chinese enterprises into world class, globally competitive firms.
- However, fixed investment continued to moderate, growing at 7.5% y/y in the first three quarters of 2017, easing by 0.7 percentage points compared to growth in the same period of 2016.
- The services sector has been the leading growth sector of the economy in 2017, growing at a pace of 8.3% y/y, and accounting for 52.9% of total value added in GDP for the first three quarters of 2017.
- Retail sales have remained strong, growing at 10.4% y/y in 2017 year to date, with September retail sales growing at 10.3% y/y.
- Online retail sales have boomed in 2017, rising by 34.2% y/y, a growth rate that was 8.1 percentage points higher than the same period last year. Online retail sales of physical goods rose by a buoyant pace of 29.1% y/y, and accounted for 14% of total retail sales of consumer goods. Online sales of services, which includes fast-growing segments such as travel, hotels and entertainment, have soared in the first three quarters of 2017, growing at a sizzling pace of 52.8% y/y.
The robust GDP growth rate of China in the first three quarters of 2017 has been an important factor underpinning global economic growth momentum and the upturn in world commodity prices, as well as helping to drive rapid export growth from the rest of APAC to China.
China’s strong growth performance is a key factor contributing to stronger world growth, with IHS Markit forecasting that world growth will strengthen from 2.5% y/y in 2016 to 3.1% y/y in 2017. IHS Markit forecasts that China’s GDP growth rate will remain strong in 2018, at 6.5% y/y, with world GDP growth forecast to rise to a pace of 3.3% as US GDP growth improves while Eurozone economic expansion remains robust.
However, China’s policymakers will continue to walk a difficult tightrope in 2018 due to significant medium term imbalances in the Chinese economy, including overcapacity in many sectors of heavy industry such as steel and coal, large NPLs in the Chinese banking system, concerns about the lending and collateral of shadow banks and rapid growth in corporate debt since 2010.
Consequently the risk of a China economic slowdown or downside risk scenario of a hard landing remains a significant risk to the medium term global outlook. The rest of the Asia-Pacific is particularly vulnerable to the risk of a China slowdown, as China’s share of total exports has risen sharply over the past decade for most major APAC economies.