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China GDP growth report raises suspicion

China has reported annualised gross domestic product growth of 6.7% for the third quarter, in line with market expectations and the government’s own forecasts. But market watchers are suspicious about the medium-term outlook.

Economists have offered mixed reactions, with some relief that there are no major alarm bells to be found in the latest pronouncements from Beijing evident. There is also some sentiment indicating the matching of the government’s own forecast in the short term appears a little too convenient however.

Erik Lueth, emerging market economist at Legal & General Investment Management, said the data point to an economy ‘in cruising speed’.

“This is based on significant stimulus and comes at the risk of financial crisis and/or Japanese-style stagnation over the medium. Q3 GDP grew at 6.7%, in line with the previous two quarters and expectations, said Lueth. “Nominal GDP surged to 9% as deflationary pressures are abating. The latter is particularly apparent in the industrial sector, which is rebounding on the back of a buoyant property market. Momentum remained strong in September, with property sales up 35% year-on-year and investment in recovery mode.”

“Risks of a painful property bust are limited at this stage,” Leuth continued. “Price declines would have little impact on consumption as household debt, while rising, is still moderate. The main conduit of a possible property bust, construction activity, is still quite lacklustre at this point in the cycle.  Similarly, we don’t see risks of a financial crisis anytime soon.”

“A breakdown of the data reveals an acceleration in primary industry and a smaller increase in the tertiary, or services, sector,” noted Craig Botham, emerging markets economist at Schroders.

Short-term focus

“Manufacturing managed stable growth. Overall, this is not a promising sign for the rebalancing story, and suggests growth is being maintained at the cost of longer term sustainability. A look at the higher frequency data helps to illustrate this point. Over the quarter, credit growth barely slowed despite a dip in corporate lending, as mortgages and government municipal bond issuance helped to fill the void,” Botham added.

Luca Paolini, chief strategist at Pictet AM, was voicing doubt about the reliability of the Chinese data even before yesterday’s release, prompting him to cut his allocation to emerging market equities last week.

“Our change in stance [on EM equities] also reflects the fact that we are a little suspicious of Chinese economic data, which have exceeded expectations over the summer after government fiscal stimulus triggered explosive gains in the housing market,” he said.

“We are less sure that the Chinese government will keep its foot on the accelerator, conscious that the respite owes much to another great helping of debt; we expect they will scale back in the second half.”

Meanwhile Bank of America Merrill Lynch has upgraded its forecasts for China as a result of this latest release. The bank’s research unit has bumped its growth prediction to 6.7% for this year and 6.6% for 2017, up from previous forecasts of 6.4% and 6.5% respectively.

Part of the Mark Allen Group.