October 19, 2018 / 2:38 AM / in a month

Instant View: China's third quarter GDP rises 6.5 percent year-on-year, slowest since 2009

BEIJING (Reuters) - China’s third quarter economic growth slowed to its weakest pace since the global financial crisis, and missed expectations, as a years-long campaign to tackle debt risks and the trade war with the United States began to bite.

The economy grew 6.5 percent in the third quarter from a year earlier, slower than the second quarter, the National Bureau of Statistics said on Friday. Analysts polled by Reuters had expected the economy to expand 6.6 percent in the July-September quarter.

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KEY POINTS

* Q3 GDP +6.5 pct y/y (f’cast +6.6 pct, prev +6.7 pct)

* Q3 GDP +1.6 pct q/q (f’cast +1.6 pct, prev +1.7 pct)

* September industrial output +5.8 pct y/y (f’cast +6.0 pct)

* September retail sales +9.2 pct y/y (f’cast +9.0 pct)

* Jan-September fixed asset investment +5.4 pct y/y (f’cast +5.3 pct)

* Sept property investment +8.9 pct y/y vs +9.2 pct in August - Reuters calculation

MARKET REACTION

Asian stock markets and China's shares fell after the data. The Australian dollar AUD=D4, seen as a liquid proxy for China demand, was steady.

COMMENTARY:

RYAN FELSMAN, SENIOR ECONOMIST, COMMONWEALTH BANK OF AUSTRALIA, SYDNEY

“The thing that stands out is the fact that the overall GDP growth for the quarter at 6.5 percent is bang in line with the Chinese target for the end of the year.

“The overall headline number will dominate of course the fact that it is the slowest since 2009, but it’s a little bit mixed underneath and the consumer side looks a bit more positive than perhaps people expected.

“We had certainty seen a weakening in net exports. So domestic demand and new export orders have declined. That’s been fairly obviously flagged in the purchasing manager’s indices we’ve seen. So that wasn’t a great surprise. There has been some front-loading with regard to exports in advancement of tariffs.

“But the full impact of tariffs probably won’t come through until 2019.”

SELENA LING, HEAD OF TREASURY RESEARCH AND STRATEGY, OCBC BANK, SINGAPORE

“Right now, the numbers suggest that the front-loading is still happening ahead of the tariffs and this is a continuing story. It doesn’t show the full impact of the trade war.

“2019 will be the year where we see the full brunt of the U.S. tariffs, if they do pass. Based on our modeling, if tariffs on the full $505 billion come to pass, then the downside risk is that growth may drop below 6 percent. In the worst case scenario, we are looking at 5.4 percent next year, which is unchartered territory for China.

“Basically, China is using many policy tools, their policy makers are juggling a lot of balls. Not only do they have to mitigate growth slowdown, they have to try to stem the deterioration of domestic sentiment.”

RAY ATTRILL, HEAD OF FX STRATEGY, NAB, SYDNEY

“It’s the proverbial mixed bag, with industrial output weak but retail sales and investment beating forecasts. It shows that China is pulling on all the levers to support domestic demand in the face of this trade pressure. There’s already a big acceleration in lending underway and now the PBOC is announcing new steps. In the end, China will do what it takes to safeguard their economy and show the U.S.: “Hey, we don’t need you.”

“On the yuan, they fixed it firm today given the move in the dollar. Clearly they don’t want to let it go in a rush. We suspect they will let it past 7.00 in the first half of next year, if only because widening rate differentials with the U.S. will be dragging on inward investment.”

TORU NISHIHAMA, CHIEF ECONOMIST, DAI-ICHI LIFE RESEARCH INSTITUTE, TOKYO

“The trend of slowdown is strengthening despite Chinese authorities’ pledge to encourage domestic investment to support the economy. Domestic demand turned out weak while exports remained solid.

“Exports probably got a boost from the last-minute shipments by foreign businesses bracing for higher tariffs by the United States. Such export rush will likely taper off from now on as the trade war with Washington intensifies.

“China’s retaliatory tariffs on its imports from the United States will also push up the cost of imports such as food grain, while oil imports also rise, all of which will likely hurt Chinese consumers’ purchasing power.

“Going forward, China’s economy will avoid a hard landing as authorities are taking steps such as monetary easing.”

BETTY WANG, SENIOR CHINA ECONOMIST, ANZ

“The 6.5 percent figure is definitely below our consensus expectations. Weakness is largely coming from the secondary industry - most notably manufacturing.

“We may review our Q4 forecasts. Property investment continues to hold up which may provide some support.”

HO WOEI CHEN, ECONOMIST, UOB, SINGAPORE

“The impact on trade is not visible yet as September trade numbers continued to grow very strongly, supported by front-loading and a weaker currency in China and also strength in the U.S. economy. Going forward, we do not see much impact on trade, as we expect front-loading to continue for the next few months. But we might see some impact next year, when tariff rates on the $200 billion worth of Chinese goods go up from 10 percent to 25 percent.

“Main impact on growth is a moderation of investment and private consumption. I think growth will continue to moderate, we are looking at 6.4 percent in the fourth quarter. For full year, it’s unchanged at 6.6 percent this year and 6.3 percent next year.”

KOTA HIRAYAMA, SENIOR EMERGING MARKETS ECONOMIST, SMBC NIKKO SECURITIES, TOKYO

“Fixed asset investment, especially public investment, was weak and it dragged down industrial production, weighing down on the GDP.

“We expect China’s economy is slowing down as a trend but it will probably manage to stay around 6.5 percent in October-December, supported by the government’s stimulus steps.

“Exports have not deteriorated yet but China’s trade will likely shrink due to China-U.S. trade conflicts. We expect an adverse impact from the trade tension will appear more clearly in data after the start of new year.”

NIE WEN, ANALYST, HWABAO TRUST, SHANGHAI

“Q3 GDP growth came in at 6.5 percent, still roughly within market expectations. But overall, growth has been slackening despite export strength. Growth in investment and consumption has been at record lows.

“Looking ahead, economic outlook is not optimistic with exports facing further headwinds as U.S. tariffs kick in and demand from emerging countries ebbs.

“GDP growth is likely to slow to 6.0-6.2 percent next year.”

BACKGROUND:

- China’s economy has been slowing slightly from the second quarter, as expected, dragged down by a years-long crackdown on riskier lending which has pushed up corporate borrowing costs.

- At the start of the year the threat of a trade war between Beijing and Washington stoked a lot of uncertainty about the outlook for growth. Now, that threat has turned into reality as the world’s two biggest economies slapped tit-for-tat tariffs on each other’s goods in recent months, raising the stakes in a dispute that many worry will ultimately extract a heavy price in terms of investment, trade and growth.

- Beijing has been stepping up policy support to offset the increasing headwinds to growth by boosting liquidity to the financial system via cuts to the level of cash that banks must hold as reserves and through a fiscally expansionary policy.  The People’s Bank of China (PBOC) has cut banks’ reserve requirement ratio (RRR)  four times this year – the latest reduction coming into effect on Oct. 15.

- Data over the last few months have shown weakness in domestic demand, with softness across factory activity to infrastructure investment and consumer spending. A sharp downturn in China’s stock market this year and continued pressure on the yuan currency are adding to the challenge for policy makers as they try to keep the economy on an even keel.

- While exports have been resilient, unexpectedly accelerating in September, much of this strength has been attributed to businesses front-loading shipments to dodge higher U.S. duties. The more timely private and official factory purchasing manufacturing index surveys showed export orders on the wane.

- Analysts and government officials expect full year growth to easily meet China’s official 6.5 percent target. Friday’s data suggests the economy could miss this goal, with the big challenge for Beijing is how to keep growing overall output in the face of U.S. President Donald Trump’s “America Only” protectionist policies.

(The story corrects the name of the Dai-ichi Life economist)

Reporting by Asia bureaus; Editing by Subhranshu Sahu

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