Economic Update


Matching Expectations

After recording 7%YoY growth in the first half of 2015, China’s third quarter GDP growth dipped slightly to 6.9%YoY, the slowest quarterly growth since the first quarter of 2009, when the economy grew 6.2%.

Although the third quarter growth rate was lower than the “target” set by the government earlier this year, there are signs of stabilization in various parts of the economy, including the property sector. While year-to-date fixed asset investment slowed to 10.3%YoY in September – the slowest pace since 2000 – the real estate climate index has continued to recover from its trough in May. At the same time, as of the end of September, year-to-date property transactions also jumped 15.3% during the first three quarters. Moreover, new home prices are stabilizing infirst-tier Chinese cities, with half of the 70 cities tracked by the National Bureau of Statistics showing month-on-month price increases in August. These trends suggest we should see some stabilization of the property market.


Consumption has shown signs of recovery, too. After the growth rate declined to 10%YoY in April – the lowest growth rate since 2003 – retail sales grew 10.9%YoY in September. In the meantime, internet sales have continued their robust growth, soaring 48.7%YoY in the first half of 2015. Urban household income, on a per capita basis, grew 8.4% during the first three quarters and is expected to support moderate consumption growth. While it is not our expectation that it can take over gross capital formation– which accounts for some 46% of China’s GDP, as of the end of 2014 – private consumption’s contribution to GDP is expected to increase progressively from 37.7%.

With the consumer price index averaging only 1.4% and producer price index averaging -5% during the first nine months of the year, policymakers can continue to expand their usage of monetary tools, something that the PBoC has been adopting since introducing the first rate cut in November 2014. The downside risk of such policy direction is related to the leveraging of the economy. As of the end of the third quarter, aggregate financing represented 220% of GDP, up 13 percentage points compared to a year ago --  a trend which continues to worry economic observers. With tax revenue up 5.2% in the first eight months of the year, there could be more leeway for the government to introduce further fiscal stimuli, on top of the tax relief measures for micro and small firms.

Despite the slowing growth rate, China’s US$10.4 trillion economy is set to achieve the government’s growth target of “around 7%.” It is worth noting that China has been moving away from the previous economic model that relied on its manufacturing sector. The services sector has been growing at a pace of 11.5%YoY during the last four quarters, while the secondary industry (manufacturing and construction) grew 2.2% over the same period. With such dynamics, the tertiary industry has been leading the secondary industry as the biggest contributor of the country’s GDPsince 2012. In the last four quarters, the services sector contributed 49.8% to China’s economic output and the secondary industry represented 41.1%. This trend is set to continue, and will make the focus on cargo volume and electricity consumption – the so-called Keqiang Index – less relevant to economic forecasts going forward.


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