TEXT-Fitch: China GDP reading in line with "new normal" growth rate

Fri Oct 19, 2012 7:55am EDT

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(The following statement was released by the rating agency)

Oct 19 - China's third-quarter GDP reading is consistent with real GDP growth slowing to the 7%-8% range that Fitch Ratings expects over 2012-2014. While growth is lower than the 9%-10% range from 2008 to 2011, the current slowdown is much less abrupt than during the global financial crisis four years ago, and we still think China's economy will avoid a hard landing.

Chinese GDP grew by 7.4% in Q3 from a year earlier, the National Bureau of Statistics said Thursday, down from 7.6% in Q2. More positively, September's retail sales saw the biggest yoy increase since March (although this may have been affected by higher sales during a holiday period), and industrial production was up 9.2% yoy.

A slowdown in growth is also evident from other data this year - such as slowing electricity production growth in H1, and negative steel output in August. In Fitch's September Global Economic Outlook, we trimmed our expectations for full-year GDP growth for 2012 to 7.8% from 8%, following the Q2 reading. China has scope for policy flexibility: we think fiscal stimulus will be modest while the labour market remains resilient, and the authorities are mindful of the risks of rapid credit growth - such as weakening the banking system. Nevertheless, the stimulus could still be sufficient to help raise growth towards 8% by year-end and support a rate of about 8.2% in 2013.

Indeed, in early September China's central planning body announced a stimulus programme involving new and existing agriculture, energy and transport projects, with an emphasis on railway infrastructure. However, these new measures could result in poor economic returns. The railways are one of the most unproductive sectors in China, and returns on infrastructure projects take time to be realised.

Over the longer-term, China needs to further re-balance its economy towards consumption from investment - in order to reduce economic instability and imbalances in the economy, while maintaining growth and limiting expectations for inflation. This remains a major task, as gross fixed-capital formation contributed a record 46.2% of GDP in 2011. A pattern of stronger consumption and weaker heavy industrial output fits the picture of a slowly rebalancing economy, although it is too early to conclude that this process will proceed quickly or smoothly.

Fitch's Long-Term Foreign-Currency IDR for China is 'A+', with a Stable Outlook. Our 'AA-' Local-Currency IDR has a Negative Outlook. A sharper-than-expected and prolonged economic slowdown is one potential trigger for a local-currency downgrade.

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