The slowdown in China GDP growth continued into the third quarter of 2014 but came in slightly better than expected. Growth slowed from 7.5% in the year to June to 7.3% in September. Average market expectations were for growth of 7.2%.
The monthly partial indicators showed industrial
production recovering over the month from 6.9% yoy in August to 8.0% yoy in
September, although down in the September quarter relative to June. Production related to external demand is
relatively strong while production related to the property market remains
weak. Fixed asset investment slowed
further over the month, again largely related to the property sector however retail
sales continue to hold up well in real terms with the year on year growth
improving from 10.6% in August to 10.8% in September.
Weakness over the quarter was clearly centered
in the domestic economy. Net exports
provided a significant positive offset to the domestic weakness, contributing
2.5% percentage points to the result. We
don’t expect the external sector will be able to continue to provide such a significant
positive offset to further domestic weakness going forward.
The Government will be keen to limit any further
deterioration in growth into the end of the year. That will see then continuing to deploy
targeted easing measures to support domestic demand, especially in the housing market. No further growth deterioration into year end would still see them miss the
growth target of 7.5% this year, although the Government seems comfortable with
a small miss.
The chance of broader easing measures such as
cuts to the benchmark interest rate have increased recently, especially given recent
low inflation outcomes. However I think
the Government would be keen to avoid that step if they can. The good news is that while China remains in
the midst of a managed slowdown and rebalancing, the Government has plenty of ammunition to throw at the economy
should conditions look to deteriorate more sharply.