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Economic Update

2016/10/20

Chinese Domestic Economy Continued to Stabilise

The Chinese economy continued to show stabilised growth in the third quarter as real GDP grew 6.7% year-on-year (YoY) in line with the economy’s performance in the first half.

Easing concerns about disinflation

As a whole, economic growth was again supported by the rapid expansion of the tertiary industry that increased 10.9% YoY in nominal terms (see Chart 1). In addition, the recovery of the secondary industry (+5.4% YoY in 3Q2016) from earlier lacklustre performances is also encouraging. Provided that these two major industries – which accounted for over 90% of the country’s GDP and 555 million jobs in 2015 – develop more sustainable growth patterns, the economy’s growth momentum will remain intact.

Notably, inflation picked up toward the end of the third quarter, and the worries about disinflation or deflation should ease. PPI growth turned positive (+0.1% YoY) for the first time in 53 months in September, while CPI inflation climbed to 1.9% YoY (see Chart 2). The slight uptick in PPI inflation was caused by the mining and industrial sectors, while the CPI inflation was mostly driven by the higher food inflation that reached 3.2% YoY in September (vs. 1.3% in August). As a result of the lower comparable bases, we believe disinflationary or deflationary pressure will continue to subside in the near term.

A dip in investment

Overall, we attribute the stabilisation of the economy to the relatively loose monetary environment. In the first nine months of 2016, newly added aggregate financing facilities reached RMB 13.5 trillion, representing 12.2% YoY growth, while growth of money supply (M1) remained at a very high rate (+24.7% YoY). Such a monetary environment has been very facilitative.

Nevertheless, investment activities moderated somewhat in the third quarter, and we expect sentiment to be negatively impacted by the less aggressive policy stance ahead. Particularly, we believe it was a signal of slowing activities as the new commodity building construction declined 19.4% YoY in September (year-to-date 6.8% YoY). Since different cooling measures in the property sector have been rolled out in over 20 cities earlier this month, there is a risk that investment sentiment could be further dampened in the near term.

Conclusion

Supported by a loose monetary stance, the overall Chinese economy has stabilised and disinflationary pressure has been going downhill. Once again, this situation suggests that decelerating growth is certainly not a major concern for the Chinese economy, even though the worries about indebtedness will likely linger (see the upcoming issue of Bulletin).

Given the stable growth pattern in the first three quarters and the leading effects of monetary policies which suggest that the accommodative monetary environment in the last year or so would support growth over the next three quarters, we are revising our 2016 growth forecast for the Chinese economy from 6.5% to 6.7%.
 

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